TRUMP’S INFRASTRUCTURE PLAN: A BOONDOGGLE

Trump promised during the campaign that he would stimulate up to $1 trillion of investment in rebuilding the country’s infrastructure. This sounds surprisingly like President Obama’s efforts throughout his presidency to spend a similar amount on public infrastructure. Obama’s proposal would have stimulated job growth and the economy. It would have helped the US more quickly and fully recover from the Great Recession of 2008. But the Republicans in Congress would have none of it. It will be interesting to see how Congressional Republicans react to a major infrastructure investment proposal from President Trump, assuming he does put a proposal forward.

There are major differences between what Trump has described and what Obama proposed. Obama proposed spending federal government money using a public decision-making process to determine the projects to be undertaken.

Trump’s plan, rather than spending federal money as Obama proposed, would provide big tax breaks to private developers. The private developers, not public officials, would select the projects to undertake. The projects would, of course, be ones on which the developers would make a profit. The private developers would effectively own the completed facility and would receive federal tax credits of 82% of their equity investment. [1] That is the equivalent of buying a home and receiving 82% of the cost back in tax credits, meaning the home that you now would own outright would only have cost you 18% of its value.

Thus, the projects that would be undertaken under Trump’s plan would be quite different than those of Obama’s approach. For example, it’s unlikely under Trump’s plan that many school buildings would be renovated or that new schools would be built. Many of our school buildings do need major renovation or to be replaced, but this is not a profit-making undertaking. Similarly, public transportation is not likely to receive much investment. Public facilities, including water and sewer systems and public housing, would only receive investments if private developers were allowed to effectively own the resulting facility and make a profit from it. We’ve already seen what happens if private interests are given control of water systems. For example, in Detroit, water rates were increased to the point where many customers couldn’t afford their water bills. Then, the water authority callously shut off water to those who were behind on their bills.

Investments in our deteriorated roads and bridges would occur only if private developers were allowed to effectively own them and to charge tolls so they could profit from their investment. Investments in buildings for commercial or residential use probably would occur, because developers can charge rents and make profits. Investments would likely be made in high-income, well-developed communities where the return on investment is assured, not in communities suffering from under-investment where infrastructure improvements are most needed.

Furthermore, many of the projects that would benefit from Trump’s plan would have been undertaken anyway, without the tax credit. Therefore, the tax breaks would be windfall profits for developers and nothing more. In addition, important sources of investment capital, such as pension funds, endowments, and collective investment funds, would not be incentivized to make infrastructure investments because they are tax-exempt, non-profit entities and would not benefit from the proposed tax credit.

Trump’s advisors claim that his infrastructure plan would pay for itself because the new revenue resulting from its projects would fully cover the lost revenue from its tax credits. This conclusion is based on clearly unrealistic assumptions. It assumes that all the projects that receive the tax credit wouldn’t have otherwise occurred, that all the workers on the projects would otherwise have been unemployed, that the workers would have taxable incomes 3 to 4 times that of typical construction workers, and that all the money invested in these projects would otherwise have been sitting idle rather than invested elsewhere. [2]

In summary, the Trump infrastructure plan would not produce the infrastructure investments that are needed and that would benefit the public. It would provide private developers with windfall profits from a big tax credit that would increase the federal government’s deficit. It would privatize decisions on infrastructure investments, the effective ownership of the facilities built, and most of the resulting benefits.

Direct spending by the federal government on needed public infrastructure would be an economically sound, rational policy for making needed investments. Given the very low interest rates at which the federal government can currently borrow money by selling Treasury bonds, the cost of raising money for such investments would be very low. Therefore, the return on investment would be unusually high.

I urge you to contact your Congress people and ask them to support infrastructure spending that will benefit our nation as a whole and not just line the pockets of private developers. Ask them to ensure that the projects undertaken create infrastructure that meets public, not private, needs.

[1] Huang, C., Van de Water, P.N., Kogan, R., and Kamin, D., 12/2/16, “Trump infrastructure plan: Far less than the claimed $1 trillion in new projects,” Center on Budget and Policy Priorities (http://www.cbpp.org/research/federal-budget/trump-infrastructure-plan-far-less-than-the-claimed-1-trillion-in-new)

[2] Huang, C., et al., 12/2/16, see above

THE RIGHT WAY TO STOP THE OFFSHORING OF US JOBS

The US needs to stop hemorrhaging jobs to other countries. For starters, we need to do three things:

Impose financial disincentives for offshoring jobs,
Change the mindset among corporate executives that offshoring jobs is the right and acceptable thing to do, and
Reverse the resignation among workers and the public who believe that the offshoring of jobs is inevitable.

To create financial disincentives, we should pass laws that place special taxes or restrictions on corporations that have offshored say 100 or more jobs in the last five years. Possible examples include:

Bar such corporations from receiving federal contracts. Or there could be demerits subtracted from the scores of proposals from such corporations in competitive bidding situations. Or there could be financial penalties on existing federal contracts such as the deduction of $10,000 per offshored job or of 1% of a contract’s annual payment per 1,000 offshored jobs, whichever is greater.
A corporation’s taxes could be increased by $10,000 per offshored job or its tax rate could be increased by 1% per 1,000 offshored jobs, whichever is greater – with no offsets to allow a corporation to avoid this tax.
Bar such corporations from receiving government tax breaks, loans, or grants.
Require such corporations to pay a special, unavoidable, and substantial tax on aggregate executive compensation that is over $1 million. [1]

Senator Bernie Sanders has announced that he will introduce a bill in Congress that will include provisions similar to these to discourage the offshoring of jobs. He is calling it the Outsourcing Prevention Act. [2]

To counter the mindset that favors offshoring jobs, we should pass laws or establish executive branch procedures that publicize a corporation’s offshoring of jobs. Possible examples include:

Require such a corporation to hold a public hearing in the community losing the jobs 90 days before the termination of the jobs. If the number of jobs is 500 or more, a hearing in Washington before a congressional committee should be required.
Establish a new anti-offshoring czar in the Office of the President who would visit any such corporation’s CEO to make it clear that offshoring jobs is viewed negatively.

Providing financial rewards to corporations to keep jobs in the US is not an efficient way to stop offshoring. Typically, state or local governments provide tax abatements or other tax benefits to corporations to keep jobs. However, state and local taxes are generally only 2% or so of a corporations’ costs. Labor costs are a far greater portion of operating costs. Therefore, tax abatements are not likely to offset the savings in labor costs provided by offshoring. For example, in the recent United Technologies / Carrier (UT/C) case in Indiana, the state will provide $7 million in tax benefits over 10 years. However, UT/C estimated was that it would save $65 million per year ($650 million over 10 years) for offshoring 2,100 jobs. [3]

Corporations’ demands for financial benefits from state and local governments to keep or create jobs are really just blackmail. To stop this job-based blackmail, which robs states or municipalities of needed tax revenue, the federal government should put a 100% tax on these financial benefits, so there is no overall financial incentive for the corporation. The federal government should also reduce grants to state and local governments that give financial incentives to corporations to keep jobs. For example, awards under the Community Development Block Grant or other economic development programs could be cut for states or municipalities that agree to pay job blackmail to corporations. The federal government has used a similar strategy in other instances to get states to change policies. For example, the federal Transportation Department used cuts in federal transportation grants to get states to raise their alcohol drinking ages to 21. This reduced car accidents and saved thousands of lives. [4]

I encourage you to contact your US Representative and Senators and ask them what they plan to do to reduce the offshoring of US jobs. Request that they support a systematic approach to discouraging offshoring such as that offered by Senator Sanders’ Outsourcing Prevention Act.

[1] Greenhouse, S., 12/8/16, “Beyond Carrier: Can Congress end the green light for outsourcing?” The American Prospect (http://prospect.org/article/beyond-carrier-can-congress-end-green-light-outsourcing)

[2] Sanders, B., 11/26/16, “Sanders statement on Carrier and outsourcing,” Press release from Senator Bernie Sanders (http://www.sanders.senate.gov/newsroom/press-releases/-sanders-statement-on-carrier-and-outsourcing)

[3] Leroy, G., 12/7/16, “Can Trump’s wild one-off at Carrier combat corporate welfare?” The American Prospect (http://prospect.org/article/can-trumps-wild-one-carrier-combat-corporate-welfare)

[4] Leroy, G., 12/7/16, see above

LOW-WAGE BUSINESS MODEL CREATES PARASITE ECONOMY

The term the parasite economy is being applied to employers whose business model is built on low-wage jobs. These corporations take more out of their employees and society than they put in, hence they are parasites. The low incomes of their workers mean that the workers can only survive with the support of the publicly-funded safety net, including subsidized food, housing, child care, and health insurance, as well as the Earned Income Tax Credit. [1] And to make matters worse, some of these corporations are ones that use loopholes in the tax code to avoid paying their fair share of taxes.

As Henry Ford realized 100 years ago, if you don’t pay your workers enough to buy the products you make, your business model will struggle to be sustainable. In 1914, Ford began paying his employees $5.00 a day, over twice the average wage in the auto industry. He also reduced the work day from 9 hours to 8 hours. Ford believed he would get higher quality work and less turnover as a result. He stated, “The owner, the employees, and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself, for otherwise it limits the number of its customers. One’s own employees ought to be one’s own best customers.” [2]

As Henry Ford acknowledged in the early 1900s, the U.S. economy is driven by consumers. About two-thirds of our economic activity today is consumer spending. However, low-wage workers have a very limited ability to purchase goods and services, either to support themselves and their families or to sustain our consumer economy. A strong middle class is essential for the vitality for our consumer economy.

Although some of our politicians deride those who use public assistance as “takers” (as contrasted with “makers”), the real “takers” in our economy and society are the low-wage paying corporations. These low-wage employers are subsidized by the tax dollars that pay for the public assistance programs their low-paid workers (and their families) rely on to survive. [3] This is corporate welfare and these corporations are truly “takers,” as opposed to “makers” who contribute to our economy and society. [4]

Low-wage corporations are parasites, making nice profits and typically paying high compensation to their executives while relying for their success on low pay and public subsidies for their workers. Walmart and McDonald’s are classic examples.

It is estimated that American taxpayers pay roughly $153 billion a year for public assistance programs that support low-wage workers and their families. Seventy-three percent or almost three out of every four people who use public assistance programs live in families where at least one person is working. Forty-eight percent of home care workers rely on public assistance, along with 46% of those providing child care and 25% of part-time college faculty. [5]

A large part of the restaurant industry is a classic example of the parasite economy. The industry association, the National Restaurant Association, is a leading advocate for the low wages of the parasite economy. It has lobbied hard and is actively engaged in election campaigns in its efforts to keep industry wages low by opposing increases in the minimum wage and supporting the existence of an even lower, special minimum wage for tipped workers. The federal minimum wage for tipped workers – most restaurant employees – is $2.13 per hour and hasn’t been changed since 1991. The median wage for restaurant servers including tips is just $9.25 per hour. As a result, restaurant servers are three times as likely to be in poverty as the average worker.

The effects of moving to a low-wage business model were seen in the 2009 outsourcing of hotel housekeeping by Hyatt Hotels in the Boston area. Ninety-eight housekeepers were fired and replaced by contracted temp workers at half the pay, with no benefits, and with almost twice the workload. The fired housekeepers, some of whom had worked for Hyatt for 25 years, had had average pay of $17 per hour with good benefits. They were financially stable and appeared secure – able to pay their bills, support their children including with college costs, and help aging parents. Today, seven years later, the effects are still being felt by some of them, who have depleted their savings, defaulted on loans, and have poor credit ratings. Some have experienced high levels of stress and health consequences. Taxpayers had to provide unemployment benefits, as well as food, housing, and health care subsidies. [6]

The low-wage business model is pervasive in the U.S. today. Seventy-three million Americans (nearly a quarter of our population) live in working poor households that are eligible for the Earned Income Tax Credit (EITC). This public program, the primary replacement for “welfare as we know it” that President Clinton ended in 1996, provides subsidies to workers who are paid so poorly they and their families cannot survive without public assistance. The federal government spent $57 billion on EITC benefits in 2014 and many states provided their own additional EITC benefits (roughly another $10 billion). Most of these workers – and you have to be working to qualify for this benefit – work for large, profitable corporations.

Between 2003 and 2013, wages (after adjusting for inflation) actually fell for the 70% of workers at the lower end of the U.S. income spectrum. Further contributing to the need for public assistance, fewer and fewer Americans have health insurance through their employers. As a result, working-poor families (as opposed to the unemployed) receive more than half of all federal and state public assistance. Beyond the EITC, public subsidies that go primarily to the working poor include ones for food and nutrition ($86 billion), child care ($71 billion), housing ($38 billion), and health insurance ($475 billion).

My next post will discuss why the parasite economy is so prevalent in the U.S. today and what we can and should do about it.

[1] Hanauer, N., Summer 2016, “Confronting the parasite economy,” The American Prospect

[2] Nilsson, J., 1/3/14, “Why did Henry Ford double his minimum wage?” The Saturday Evening Post (http://www.saturdayeveningpost.com/2014/01/03/history/post-perspective/ford-doubles-minimum-wage.html)

[3] Hanauer, N., Summer 2016, see above

[4] Johnson, J., 5/3/16, “McDonald’s, the corporate welfare moocher,” Common Dreams (http://www.commondreams.org/views/2016/05/03/mcdonalds-corporate-welfare-moocher)

[5] Jacobs, K., 4/15/16, “Americans are spending $153 billion a year to subsidize low-wage workers,” The Washington Post (https://www.washingtonpost.com/posteverything/wp/2015/04/15/we-are-spending-153-billion-a-year-to-subsidize-mcdonalds-and-walmarts-low-wage-workers/?utm_term=.7120f83f959f)

[6] Boguslaw, J., & Trotter Davis, M., 9/5/16, “Lessons from the Hyatt 100,” The Boston Globe

LACK OF GOVERNMENT SPENDING LEADS TO WEAK RECOVERY

The current economic recovery from the Great Recession of 2008 has been the weakest recovery since World War II. The average annual growth of our economy since the recession officially ended in June 2009 has been only 2.1%. [1] The other ten recoveries since 1949 have had annual growth rates of 2.8% to 7.6%, with an average of 4.65%. [2]

It’s not a coincidence that every other economic recovery since WWII was supported by increased government spending (federal, state, and local combined), except the one in 1970 – 1973. The current recovery (2009 – 2016) has seen government spending actually decline by 6.1%. It and the one in the 1970s both experienced declines in government spending of about 1% annually. The 1949 – 1953 recovery saw government spending increase at an annual rate of 17.9%, while the other eight recoveries averaged a little over 2%.

In contrast to the 6.1% decline (-0.9% annually) in government spending during the current recovery, government spending during the 2001 – 2007 recovery under President George W. Bush grew by 11.7% (1.9% annually) and during the 1982 – 1990 recovery under President Reagan it grew by 33.5% (3.8% annually).

A recession is defined as a period of time when economic output (i.e., Gross Domestic Product [GDP]), incomes, employment, industrial production, and sales decline. This occurs when the demand for goods and services in our markets – the spending of households, businesses, and governments – is not sufficient to purchase everything the economy is capable of producing.

The remedy for a recession is to boost marketplace demand. There are three ways to do this:

Reduce interest rates to spur borrowing and resultant spending,
Increase government spending, and
Cut taxes to spur spending by consumers, which increases demand for goods and services. (Consumer spending represents two-thirds of our economy.)

At the start of the Great Recession, interest rates were already very low so there was not much interest rate reduction that could be done. Currently, the basic interest rates of the Federal Reserve, the key ones to cut to stimulate the economy, are virtually zero.

Some cutting of taxes was done, but it was small scale because of concerns about increasing the federal deficit or creating unmanageable losses of revenue at the state level. Tax cuts for middle and low income Americans are the most effective stimulus for the economy because this group will quickly spend the increased money that’s in their pockets in the local economy. Tax cuts for wealthy individuals and corporations, which were favored by some politicians, are less effective because larger portions of this money will be saved or spent outside the local economy (e.g., overseas), so they are not as effective in stimulating the local economy.

As noted above, government spending decreased during the current recovery and therefore reduced economic growth. Spending in the economy, including government spending, has what’s referred to as a “multiplier effect” on growth. That’s because each dollar spent supports additional spending by the individual or business that received it (a cycle that is repeated endlessly), meaning that its impact is multiplied. Similarly, cuts in spending have a multiplier effect in reducing growth, reducing economic activity by more than a dollar for each dollar of reduced spending.

One reflection of reduced government spending is that the number of government employees today is roughly 400,000 fewer than it was at the beginning of the recovery in June 2009, after bottoming out in late 2013 at 800,000 less than in 2009. Each person without a job adds to unemployment and reduces consumer demand for goods and services. Prior to President Obama’s term, the total number of government employees had grown under every president since Eisenhower. [3] This loss of jobs has been primarily at the state and local levels, where government revenue was hard hit by the recession, has been slow to recover, and has not been augmented by increased funding from the federal government. Government spending per resident in the U.S. is 3.5% lower today than it was in 2009. [4]

This austerity (i.e., reductions in government spending) are widely viewed as the primary reason the current economic recovery has been so weak and so slow. Government spending cuts have occurred largely because Republican lawmakers at the federal and state levels have insisted on them. [5] If it weren’t for these cuts, economic growth would be stronger and our economy would have lower unemployment and under-employment. [6] To confirm the harm that austerity policies cause, one can look to Europe and especially Greece, where austerity policies even more extreme than the ones in the U.S. have resulted in continuing high unemployment and fiscal crises.

Government spending, even if it increases the federal government’s budget deficit in the short-term, will stimulate economic growth. This growth will lead to increased government revenue that will reduce the deficit.

In particular, spending that represents investments in our physical and human capital has a high rate of return and pays for itself over the long-term. [7] Investments in infrastructure (e.g., roads, bridges, trains, public transportation systems, and school buildings) and education (from birth through higher education) create jobs, support our current and future economies, and address real needs while also stimulating the economy. Especially with the extremely low interest rates at which the federal government can currently borrow money, it is a lost opportunity to fail to make important and needed investments in our future.

[1] Morath, E., & Sparshott, J., 7/29/16, “U.S. GDP grew at a disappointing 1.2% in second quarter,” The Wall Street Journal (http://www.wsj.com/articles/u-s-economy-grew-at-a-disappointing-1-2-in-2nd-quarter-1469795649)

[2] Scott, R.E., 8/2/16, “Worst recovery in postwar era largely explained by cuts in government spending,” Economic Policy Institute, Working Economics Blog (http://www.epi.org/blog/worst-recovery-in-post-war-era-largely-explained-by-cuts-in-government-spending/)

[3] Walsh, B., 8/5/16, “Here’s an Obama-era legacy no one wants to talk about,” The Huffington Post (http://www.huffingtonpost.com/entry/obama-austerity-legacy-jobs_us_57a499ece4b03ba68012032b?)

[4] Bivens, J., 8/11/16, “Why is recovery taking so long – and who’s to blame?” Economic Policy Institute (http://www.epi.org/files/pdf/110211.pdf)

[5] Bivens, J., 8/11/16, see above

[6] Scott, R.E., 8/2/16, see above

[7] Scott, R.E., 8/2/16, see above

TAX BREAKS: PROMOTING SAVING FOR RETIREMENT OR PERPETUATING FAMILY WEALTH?

Our income tax system provides incentives to save for retirement. Individuals can contribute up to $5,500 per year to an Individual Retirement Account (IRA) or $18,000 to an employer-sponsored retirement plan and not pay income tax on the amount saved. (These amounts are $1,000 and $6,000 higher, respectively, for those over 50.)

This exemption from income tax is intended as an incentive to help low and moderate income individuals save for retirement. The tax exemption for IRAs is phased out as the adjusted gross income (AGI) on one’s tax return increases. The phase out varies by a taxpayers’ status (e.g., single, married, filing jointly or separately, with or without an employer retirement plan), however, for all taxpayers with an AGI over $200,000, there is no income tax exemption.

The contribution limits are sufficient to provide, along with Social Security, a modest, but reasonable retirement income even at the lowest of the contribution limits. For example, if one put $5,500 into an IRA every year over a 40 year career ($220,000) and invested it reasonably, earning a 5% – 6% annual return, one would have over half a million dollars ($500,000) saved at retirement. With an employer-sponsored retirement plan, one could save three times as much and have quite a comfortable retirement.

However, there is a loophole in our tax laws that allows highly paid executives and investment managers to avoid income tax by putting huge amounts of money into “retirement” accounts, called deferred compensation accounts. These wealthy individuals don’t need any tax incentives to save for retirement. And it makes no sense to allow them to avoid income tax on huge sums of money that far exceed what they will need in retirement.

For example, the CEO of Progressive Insurance last year put over $26 million into his deferred compensation account. He now has over $150 million in this account, which is enough to provide him with an income of $850,000 per month for the rest of his life.

The retirement savings of the top one hundred CEOs are equal to those of 50 million American families (41% of the population). Employees at some of these CEOs’ companies have no retirement plan or savings at all. Furthermore, about half of these CEOs have traditional pensions as well; something most American workers have seen vanish over the last two decades. The CEOs of the 500 largest corporations have $3.2 billion in their deferred compensation accounts and avoided roughly $78 million in income taxes in 2014 by putting almost $200 million more into their “retirement” accounts than regular employees would have been allowed to save in their retirement accounts. [1]

The tax incentives that are supposed to be promoting saving for retirement are poorly designed and inefficient. Most of the benefits go to a small number of individuals with very high incomes. [2]

This is one example of how the rich and powerful have bent our tax laws to their benefit. It is also one reason that economic inequality is growing. And it is a piece of the puzzle of why social class mobility is diminishing in the US. These wealthy individuals obviously won’t spend all of these huge tax-deferred savings during their retirements, so these “retirement” savings will be passed on to their heirs, ensuring that the next generation of these families remains part of the economic elite.

[1] Klinger, S., & Anderson, S. (10/28/15). “A Tale of Two Retirements,” Institute for Policy Studies (http://www.ips-dc.org/tale-of-two-retirements/)

[2] Morrissey, M. (3/3/16). “The state of American retirement: How 401(k)s have failed most American workers,” Economic Policy Institute (http://www.epi.org/publication/retirement-in-america/)

THE YEAR-END SPENDING BILL: A BIG WIN FOR SPECIAL INTERESTS, WHILE KEEPING GOVERNMENT OPERATING

The year-end spending bill that Congress passed on December 18 was loaded with riders that had nothing to do with the budget. For example, it lifted the 40-year-old ban on crude oil exports from the US, just as the climate summit in Paris concluded that emissions from burning fossil fuels must be lowered to address climate warming. The bill continued a ban on federal funding for public health studies of the causes of gun violence and continued to allow people on the no-fly list to buy guns. It repealed the 2008 requirement that meat sold in the US has to identify its country of origin.

This spending bill also included two provisions that block the disclosure of the sources of political spending. The Internal Revenue Service is prohibited from requiring the disclosure of political spending by and donors to not-for-profit entities that engage in political activity. And the Securities and Exchange Commission is prohibited from requiring the disclosure of political spending by corporations. [1]

The bill also had pork barrel spending inserted by individual members of Congress. For example, a provision for Senator Cochran of Mississippi directs the Coast Guard to build a $640 million ship in his home state, but the Coast Guard says the ship isn’t need. Similarly, Maine Senator Collins got $1 billion in the budget for a destroyer that will probably be built in Maine, but the Navy says the ship isn’t needed. [2]

The good news is that the year-end spending bill keeps our government open and operating and funds important programs for middle and low-income Americans. Furthermore, many even more odious riders were kept out of the bill. As I noted in my last post, the good news about the separate year-end tax bill is that 40% of its provisions actually benefit regular, working Americans. This percentage is almost double what it has been in the past. Concerted activism by progressive politicians, leaders, and regular Americans made some good things happen in both the year-end spending bill and the year-end tax bill.

The bad news is that, as Moyers and Winship write, “There is an unwritten rule in Congress that before you do even a little for the working class you must do a lot for the donor class.” [3] These bills do a lot for the donor class – wealthy individuals and the corporations they run. As Moyers writes, “Candidates ask citizens for their votes, then go to Washington to do the bidding of their donors,” including cutting their taxes. So, we now have a wealthy donor class that gets high levels of representation and low levels of taxation. [4]

So, keep an eye on and be in touch with your elected officials. Let them know you are watching. Let them know that you want them to serve the interests of regular, working Americans, not those of the donor class of economic elites and the corporations they run. Make this a New Year’s resolution, because your activism as an informed citizen in a democracy can make a difference. Indeed, it has to, or our democracy, of, by, and for the people, will become a plutocracy run by and for the wealthy.

[1] Moyers, B., & Winship, M., 12/17/15, “Lurking Within That Ominous, Omnibus Spending Bill,” Moyers & Company (http://billmoyers.com/story/lurking-within-that-ominous-omnibus-spending-bill/)

[2] Moyers, B., 12/22/15, “The Plutocrats Are Winning. Don’t Let Them!” Common Dreams (http://www.commondreams.org/views/2015/12/22/plutocrats-are-winning-dont-let-them)

[3] Moyers, B., & Winship, M., 12/17/15, see above

[4] Moyers, B., 12/22/15, see above

THE YEAR-END TAX BILL: A BIG WIN FOR CORPORATIONS AND A LITTLE WIN FOR WORKING AMERICANS

Because of the gridlock in Congress, so few bills pass that those that have to pass get laden with special interest provisions and riders like ornaments on a Christmas tree. The recent year-end spending bill (2,009 pages long) and tax legislation (233 pages long) are the latest two examples. There were literally thousands of riders attached to these two massive and complicated bills. Many special interest provisions are slipped in by powerful legislators, typically on behalf of corporate lobbyists, when there is little time for other legislators (let alone the public) to scrutinize them. Nonetheless, these provisions can produce significant, windfall benefits for the targeted beneficiaries. Not surprisingly, the executives of the corporations that stand to reap the benefits are often large campaign contributors. [1]

The tax legislation Congress passed on December 18 was a $686 billion 10-year package. In it, Congress made permanent two recent expansions of tax credits that support low-income, working families: the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Over the next 10 years, this will put $118 billion in the pockets of low-income working Americans. This will keep 16 million people from falling into poverty or deeper into poverty and it will help the economy by putting money in the pockets of people who will spend it at local businesses.

Congress also renewed the American Opportunity Tax Credit. It provides a tax credit of up to $2,500 per year for the costs of college. This will give a helping hand to millions of families struggling with the costs of higher education.

Overall, nearly 40% of the tax breaks in this legislation – approximately $250 billion – benefit working Americans who are overwhelmingly low- and middle-income. Typically, when the year-end tax cut package is passed low- and middle-income Americans have gotten just 20% of the tax breaks. So this year, with advocacy by many progressive leaders and activists, the benefits for working families were double what they usually are. [2]

This is the difference that political activism can make. Thank you to all of you who contributed your time, efforts, and voices to this fight.

Nonetheless, corporations got more than $400 billion in tax breaks. For example, heavy lobbying by Wall Street financial institutions made permanent a supposedly temporary, major tax loophole that makes it easier to stash profits offshore and avoid taxation here at home. This $78 billion (over 10 years) tax loophole has helped General Electric go five straight years without paying any federal income tax, and instead getting billions in refunds. Another offshore tax loophole was extended for five years at a cost of $8 billion. A special tax provision on the depreciation of equipment, intended as a temporary measure to fight the 2008 recession, was extended for another six years costing $28 billion in lost corporate tax revenue. Corporate lobbyists helped draft the language of at least some of these tax giveaways.

The hypocrisy of the supposed deficit fighters in Congress was on full display. None of the $400 billion in corporate tax breaks was paid for; their cost was simply added to deficit. Not one loophole was closed or tax subsidy eliminated to pay for this largesse. Yet when a provision to extend benefits for 9/11 first responders came up, the supposed deficit hawks insisted that it had to be paid for with spending cuts and new revenue!

My next post will cover highlights of the year-end spending bill.

[1] Moyers, B., 12/22/15, “The Plutocrats Are Winning. Don’t Let Them!” Common Dreams (http://www.commondreams.org/views/2015/12/22/plutocrats-are-winning-dont-let-them)

[2] Clemente, F., 12/22/15, “Families Advance With Recent Tax Bill, But Corporations Got a Lot More,” The Huffington Post (http://www.huffingtonpost.com/frank-clemente/families-advance-with-rec_b_8861986.html)

DANGER AHEAD IN DC: CORPORATIONS AND THE WEALTHY POISED TO TAKE ADVANTAGE

ABSTRACT: Some people in Washington, D.C., are taking the election results as an indication that Republican policy priorities are in favor with the public. Furthermore, the Republicans in Congress and the President may want to show that they can work together, get things done, and pass new laws. Senator Elizabeth Warren (Democrat from Massachusetts) warns us that big corporations and their lobbyists will try to take advantage of this situation. (As my previous post (11/25/14) documented, the conclusion that Republican policy priorities are in favor with the public is not an accurate interpretation of the election results.)

Given Warren’s warning, it’s little surprise that the House this week passed a massive package extending tax breaks primarily for banks, investment firms, and other wealthy interests. The more than 50 tax breaks included in the bill would add nearly $42 billion to the budget deficit over the next decade. Surprisingly, there seems to be little concern over this cost. Previously, less expensive initiatives (that benefited the unemployed, low income families, and families with child care expenses) were defeated, supposedly because they were unaffordable.

I encourage you to contact your Senators and the President to let them know that these tax breaks for big corporations and wealthy individuals, if warranted, should be paid for by closing loopholes benefiting these same groups. Furthermore, I’d encourage you to note that the focus of any tax breaks and other legislation should be on helping low and middle income families and individuals, not wealthy corporations and individuals.

FULL POST: Some people in Washington, D.C., are taking the election results as an indication that Republican policy priorities are in favor with the public. This may include President Obama, who may feel that he has to reach out and accommodate the new Republican majorities in the Senate and House. Furthermore, the Republicans in Congress and the President may want to show that they can work together, get things done, and pass new laws. Senator Elizabeth Warren (Democrat from Massachusetts) warns us that big corporations and their lobbyists will try to take advantage of this situation. [1]

As my previous post (11/25/14) documented, the conclusion that Republican policy priorities are in favor with the public is not an accurate interpretation of the election results. Truly progressive candidates won in the US Senate and elsewhere. Progressive ballot initiatives won across the country, including in states that were electing Republicans. The public supports, among other things, improved pay and paid sick leave for low income workers, as well as stronger regulation of campaign spending and the ethics of elected officials.

As Warren writes, “The stock market and gross domestic product keep going up, while families are getting squeezed hard by an economy that isn’t working for them. … they see a government that bows and scrapes for big corporations, big banks, big oil companies and big political donors — and they know this government does not work for them.” She states that we the people should look carefully at any new laws that surface in Congress or get to the President’s desk to be signed and examine whose interests they serve. The big corporations, their lobbyists, and the elected officials whose campaigns they and their wealthy allies funded will try to take advantage of the situation to push their agendas and benefit their interests. [2]

She warns us to be on the lookout for “trade deals negotiated in secret, with chief executives invited into the room while the workers whose jobs are on the line are locked outside. … tax deals that carefully protect … billionaires and big oil and other big political donors, while working families just get hammered.” She also is concerned that the big Wall Street financial corporations will try to weaken regulation despite their billions in profits and huge executive pay packages, which they are reaping only because of huge public bailouts after they crashed our economy in 2008.

Given Warren’s warning, it’s little surprise that the House this week passed a massive package extending tax breaks primarily for banks, investment firms, and other wealthy interests, such as NASCAR race track owners, filmmakers, racehorse owners, and rum producers. However, the bill fails to extend tax breaks for low income families and for child care expenses. There are some benefits for teachers, commuters, individuals in states without an income tax, and small businesses, but the bulk of the benefits go to wealthy corporations and individuals. [3]

The more than 50 tax breaks included in the bill would add nearly $42 billion to the budget deficit over the next decade. Surprisingly, there seems to be little concern over this cost. Previously, less expensive initiatives (that benefited the unemployed, low income families, and families with child care expenses) were defeated, supposedly because they were unaffordable.

The President has threatened to veto the bill, saying it favors large corporations over families and the middle class. The Senate’s leaders have not yet indicated what they plan to do with this legislation from the House.

[1] Warren, E., 11/11/14, “It’s time to work on America’s agenda,” The Washington Post

[2] Warren, E., 11/11/14, see above

[3] Ohlemacher, S., 12/4/14, “House votes to extend tax breaks through December,” The Boston Globe from the Associated Press

THE IGNORED DEFICIT IN PUBLIC GOODS

ABSTRACT: The federal government’s budget deficit is getting more attention than it deserves. It is half of what it was in 2009 and is at what economists consider a manageable level. Meanwhile, our deficit in investments in public goods is being almost totally ignored. Public goods are things of value to society but in which individuals, businesses, and other private organizations don’t and won’t invest.

These public goods are essential to a prosperous society. However, the US has been under-investing in public goods for decades. The paradox of public goods is that they are forgotten, unacknowledged, and in effect invisible when they are readily available.

Government spending on public goods has been in a relatively steep decline since the 2008 economic crash. And for the 30 years before that the investment in public goods had been in a slow decline.

Those opposed to a robust government, ideologically or due to self-interest, have engaged in an active campaign to get the public to forget the personal and societal benefits they receive from government. A discussion about public goods is largely missing from our media and society.

We need to correct this omission in our discourse and our investment in order to have a prosperous society. Without necessary public goods, we cannot maintain our health and productivity as individuals; nor will we be able to maintain the health and productivity of our businesses and ultimately those of our economy and society.

FULL POST: The federal government’s budget deficit is getting more attention than it deserves. It is half of what it was in 2009 and is at what economists consider a manageable level. (See post of 4/6/13. [1]) Meanwhile, our deficit in investments in public goods is being almost totally ignored.

Public goods are things of value to society but in which individuals, businesses, and other private organizations don’t and won’t invest. Public goods provide public benefits and require collective efforts and responsibility. Therefore, the public sector, namely government, must take responsibility for them. Children’s education, from birth through high school and beyond, is a classic example. Transportation infrastructure is another, including roads, railroads, bridges, airports, and ports. Other examples include parks, libraries, scientific research, public and individual health (including healthy air and water), and public safety (including safe communities, workplaces, homes, food, and medicine). A large, thriving, economically solid middle class may be the ultimate public good.

These public goods are essential to a prosperous society. [2] However, the US has been under-investing in public goods for decades. Part of the reason for this is that when they are present and functioning effectively, we forget about them – they are out of sight and out of mind. This is the paradox of public goods: they are unacknowledged and in effect invisible when they are readily available. We forget that there was a need or problem that has been addressed. Or we don’t realize that a problem, such as polluted drinking water, could occur if we don’t invest in protective and preventive measures. We forget that public expenditures by government were what met the need, maintain the solution, and prevent problems. [3]

However, here in the US, we are beginning to notice our public goods deficit. We’ve had bridges collapse or be closed because they are unsafe. Many of our school buildings are old, out-of-date, and in some cases unsafe. Students are leaving college with huge debts. Local governments are cutting police, fire, and school personnel. Our middle class and its economic security is dwindling. And so on.

Government spending on public goods has been in a relatively steep decline since the 2008 economic crash. And for the 30 years before that the investment in public goods had been in a slow decline. Economist John Kenneth Galbraith warned us way back in the 1950s that improper government budget priorities could lead to “private opulence and public squalor.”

In addition to the invisibility of public goods, those opposed to a robust government, ideologically or due to self-interest, have engaged in an active campaign to get the public to forget the personal and societal benefits they receive from government spending and actions. They have explicitly labeled government as the problem not a solution to problems. In fact, a survey of the public found that 94% of those who reported never receiving a benefit from a government program had indeed received benefits from one or more government programs and on average from four programs. [4]

A discussion about public goods is largely missing from our media and society. The notion of air, water, parks, and so forth, as shared public goods that require and deserve public investment is mostly missing from public consciousness. Our discussion of the production of wealth and goods by the private sector is robust, but the discussion is atrophied in terms of the role of the public sector and of the public goods that it produces, maintains, and protects.

We need to correct this omission in our discourse and our public spending in order to have a prosperous society. Without necessary public goods, we cannot maintain our health and productivity as individuals; nor will we be able to maintain the health and productivity of our businesses and ultimately those of our economy and society.

[1] The shrinking deficit at https://lippittpolicyandpolitics.org/2013/04/06/the-shrinking-deficit/.

[2] Hacker, J.S., & Loewentheil, N., 2012, “Prosperity economics: Building an economy for all,” Prosperity for All (http://www.prosperityforamerica.org/wp-content/uploads/2012/09/prosperity-for-all.pdf)

[3] Derber, C., & Sekera, J., 1/22/14, “An invisible crisis: We are suffering from a mushrooming public goods deficit,” The Boston Globe

[4] Mettler, S., 9/19/11, “Our hidden government benefits,” The New York Times

THE FEDERAL BUDGET DEAL

ABSTRACT: As you probably know, Congress will vote this week on a budget deal for fiscal years 2014 and 2015. If the budget deal doesn’t pass, the government would shut down again on Jan. 15. The deal could fail to pass in Congress. Without a deal, the phase 2 sequester cuts take effect and would be much more painful than the phase 1 cuts were this year. Under the sequester, the 2013 cap on discretionary domestic and military spending is $986 billion. This cap is slated to drop to $967 billion for 2014.

The budget negotiators are proposing spending $1,012 billion in 2013 and $2,014 billion in 2015, claiming deficit reduction of $23 billion over 10 years and smarter budget cutting than the across-the-board sequester’s cuts. However, some of the shrink-the-government diehards are opposed to this increase in spending.

To cut costs, the contributions new federal civilian employees pay into their pension fund will increase and military pensions will receive smaller cost of living increases. To increase revenue, airlines’ fees to pay for the TSA will go up, resulting in a $5 increase in add-on fees on each airline ticket. This consumer fee increase has been criticized and some in Congress have suggested closing the private jet tax loophole as an alternative.

A bone of contention is that the deal does not extend the emergency unemployment benefits for the long-term unemployed. These benefits will expire on Dec. 28 for 1.3 million workers. Without an extension, an additional 850,000 workers’ will lose benefits in the first quarter of 2014. This would have an estimated impact on the economy of 300,000 fewer jobs in 2014 and a reduction in economic growth of 0.4%.

If there are issues in these budget negotiations that you feel strongly about, now is the time to contact your Congress people and get your two cents (or more) into the discussion.

FULL POST: As you probably know, Congress will vote this week on a budget deal for fiscal years 2014 (which started last Oct. 1) and 2015. Their deadline is this Friday because Congress is planning to adjourn and go home for the holidays then. Other deadlines are lurking behind this one: the temporary extension of the fiscal year 2013 budget in October expires on Jan. 15, the second round of automatic budget cuts (phase 2 of the sequester) goes into effective Jan. 1, and long-term unemployment benefits expire on Dec. 28.

If the budget deal doesn’t pass, the government would shut down again on Jan. 15, a result almost no one appears to want. The deal could fail to pass in Congress because the negotiating has been done by a small group and there is opposition to the deal from multiple sides. [1]

Without a deal, the phase 2 sequester cuts would take effect and would be much more painful than the phase 1 cuts were this year. Many federal agencies and programs were able to use surplus or reserve funds that are now exhausted. In the case of air traffic controllers, airport construction funds were used to fund them and aren’t available again. And some one-time accounting maneuvers were used. Therefore, the second round of cuts will have much greater impacts. [2] The phase 2 sequester cuts in government spending would also hurt the economy and cost an estimated 800,000 jobs in 2014. [3]

Nonetheless, a number of issues could derail the budget deal. One such issue is the overall spending caps currently in place under the sequester, officially known as the Budget Control Act (BCA) of 2011. The 2013 cap on discretionary domestic and military spending is $986 billion. This cap is slated to drop to $967 billion for 2014.

The budget negotiators are proposing spending $1,012 billion ($1.012 trillion) in 2013 and $2,014 billion in 2015. Military spending would be $521 billion and non-military spending $492 billion. [4][5] With some offsetting revenue increases and future cuts in spending, they are claiming deficit reduction of $23 billion over 10 years and smarter budget cutting than the across-the-board sequester’s cuts. [6] However, some of the shrink-the-government diehards are opposed to this increase in spending. Spending that Obama called for in his State of the Union speech on education and infrastructure (in part to create jobs) is not part of the budget deal.

To cut costs, the contributions new federal civilian employees pay into their pension fund will increase ($6 billion over 10 years). This is causing some pushback given that federal workers have already experienced a 3 year pay freeze, unpaid furloughs due to the sequester, and delays in receiving their pay during the government shutdown. [7] Military pensions will receive smaller cost of living increases ($6 billion over 10 years). A cut in payments to Medicare health care providers is extended 2 years to 2023 ($23 billion). [8] Costs of mineral leases and petroleum extraction research will also be cut.

To increase revenue, airlines’ fees to pay for the Transportation Security Administration (TSA) will go up, resulting in a $5 increase in add-on fees on each airline ticket. This consumer fee increase has been criticized and some in Congress have suggested closing the private jet tax loophole as an alternative way to raise revenue. [9] Companies’ premiums for insuring pension plans will increase, however, the closing of corporate tax loopholes, including the use of offshore tax havens (which alone could generate over $20 billion a year in revenue), that some in Congress had called for, are not part of the deal. [10]

A bone of contention is that the deal does not extend the emergency unemployment benefits for the long-term unemployed. These benefits will expire on Dec. 28 for 1.3 million workers who have been out of work for longer than the usual 26 week limit on benefits. An extension of benefits would cost $25 billion for 2014. Not only do such benefits help the workers and their families, but they also support the economy by helping to maintain household incomes and consumer spending, which is two-thirds of our economy. [11] Without an extension, an additional 850,000 workers’ will lose benefits in the first quarter of 2014 when their regular 26 weeks of benefits run out, and 4.8 million workers would be affected by expiring benefits over the course of 2014. This would have an estimated impact on the economy of 300,000 fewer jobs in 2014 and a reduction in economic growth of 0.4% (from a current level of 2.4% for 2013) in the first quarter of 2014. [12] Some Democrats would still like to see this in the budget deal, while others are planning to push it separately in the near future.

Although unemployment is down to 7.0%, long-term unemployment is still a serious problem. Furthermore, the emergency long-term unemployment benefits were started under President George W. Bush when unemployment was only 5.6%. Over 37% of the unemployed have been unemployed for over 26 weeks, and this percentage is still rising. [13]

If a budget deal is successfully passed by Congress and signed by the President, it will be the first official budget since 2011. However, a number of issues could present challenges to passage in the House or the Senate.

If there are issues in these budget negotiations that you feel strongly about, now is the time to contact your Congress people and get your two cents (or more) into the discussion.

[1] Everett, B., & Gibson, G., 12/8/13, “Budget talks worry those not in the room,” Politico

[2] Taylor, A., 11/12/13, “Mandated cuts expected to be more painful in ’14,” The Boston Globe

[3] Montgomery, L., 12/6/13, “Congressional GOP may be willing to let emergency unemployment benefits lapse,” The Washington Post

[4] Weisman, J., 12/11/13, “Congressional negotiators reach deal on federal budget,” The Boston Globe from The New York Times

[5] Przybyla, H., 12/11/13, “Budget deal easing spending cuts faces Republican ire,” Bloomberg

[6] Weisman, J., 12/6/13, “Congress appears near a modest accord on the budget,” The Boston Globe from The New York Times

[7] Montgomery, L., 12/9/13, “Budget deal expected this week amounts to a cease-fire as sides move to avert a standoff,” The Washington Post

[8] Espo, D., & Taylor, A., 12/10/13, “Congressional negotiators reach budget pact,” The Boston Globe

[9] Przybyla, H., 12/6/13, “Budget negotiators seek limited deal as opposition mounts,” Bloomberg

[10] Tong, J., 12/5/13, “Representatives Doggett and DeLauro introduce legislation to end sequestration and corporate offshore tax havens,” Common Dreams (www.commondreams.org/newswire/2013/12/05-4)

[11] Krugman, P., 12/8/13, “The punishment cure,” The New York Times

[12] Lowrey, A., 11/17/13, “Extension of benefits for jobless set to end,” The New York Times

[13] Needham, V., 12/8/13, “Advocates see hope for renewal of unemployment benefits extension,” The Hill

FUNDING SOCIAL SECURITY

ABSTRACT: Advocates for cutting Social Security benefits claim that cuts are needed because of a future funding shortfall. However, Social Security’s projected shortfall is small and 20 years in the future. Moreover, there are adjustments to the funding for Social Security that will easily eliminate the future funding shortfall.

The two most frequently mentioned ways of cutting Social Security’s costs are reducing future benefit payments and increasing the retirement age. The leading proposal would cut benefits by reducing the annual cost of living increases that seniors receive. However, to most accurately reflect the change in the cost of living that seniors actually experience, the annual increase in benefits should be greater than it is currently, not less. Cutting benefits will hurt retirees who rely on their modest Social Security benefits to make ends meet.

Another way to reduce Social Security’s cost is by increasing the age for receiving Social Security. The age for collecting full Social Security benefits is being increased from 65 to 67. People are living longer on average, but those with low incomes and less education have seen very little change in their life expectancy. Therefore, it hardly seems fair to increase the Social Security retirement age further.

The simplest and probably fairest way to address the Social Security shortfall would be to eliminate or increase the cap on the earnings that are subject to the Social Security tax. If the cap were eliminated, Social Security’s shortfall would be solved for at least 75 years.

FULL POST: Advocates for cutting Social Security benefits claim that cuts are needed because of a future funding shortfall. However, Social Security’s projected shortfall is small and 20 years in the future. It has no impact on the federal deficit because Social Security has its own, dedicated funding stream. So cutting benefits will do nothing to reduce the deficit but would hurt retirees who rely on their modest Social Security benefits to make ends meet. (See my post The Retirement Crisis and Social Security of 11/26/13 for more information. https://lippittpolicyandpolitics.org/2013/11/26/the-retirement-crisis-and-social-security/) Moreover, there are adjustments to the funding for Social Security that will easily eliminate the future funding shortfall.

The two most frequently mentioned ways of cutting Social Security’s costs are reducing future benefit payments and increasing the retirement age. The Republican budget and President Obama and some Democrats have proposed that benefits be cut by reducing the annual cost of living increases that seniors receive. This would be accomplished by using a different and lower measure of the Consumer Price Index (CPI) to calculate the annual adjustment in benefits – the “Chained CPI” instead of the regular CPI. (See my post Social Security and Chained CPI of 4/13/13 for more information. https://lippittpolicyandpolitics.org/2013/04/13/social-security-and-chained-cpi/)

However, the most accurate measure of the change in the cost of living for seniors is the CPI-E (for Elderly), and it is typically higher than either of the regular CPI (which is currently used) or the proposed “Chained CPI”. This means that to most accurately reflect the change in the cost of living that seniors actually experience, the annual increase in benefits should be greater than it is currently, not less. The bills in Congress to strengthen Social Security generally include the use of CPI-E for the annual cost of living adjustment. [1]

Another way to reduce Social Security’s cost is by increasing the age for receiving Social Security. The age for collecting full Social Security benefits is being increased from 65 to 67. (One can get Social Security benefits at younger ages but the amount received is reduced.) The major argument for this is that people are living longer on average. They are, but it is the well educated and affluent who are living longer. Those with low incomes and less education have seen very little change in their life expectancy and those with the least education have seen their life expectancy decline. [2] Therefore, it hardly seems fair to increase the Social Security retirement age further.

The simplest and probably fairest way to address the Social Security shortfall that’s 20 years in the future would be to eliminate or increase the cap on the earnings that are subject to the Social Security tax. (This Social Security tax is the dedicated and sole funding source for Social Security.)

Currently, Social Security tax is only paid on the first $113,700 of earnings. Amounts above that are untaxed. For workers earning up to that amount, they pay a 6.2% tax that is deducted from their paychecks and their employers match that amount. But because of the cap, someone making $1 million only pays tax on $113,700 of earnings, meaning that overall they pay less than 1% (instead of 6.2%) of their earnings into Social Security. If the cap were eliminated, Social Security’s shortfall would be solved for at least 75 years.

The bills in Congress to strengthen Social Security generally solve the funding shortfall by increasing the funding from the Social Security tax. Some raise or eliminate the cap on earnings subject to the tax. Others apply the tax to earnings over $250,000 but not to earnings between the current cap and $250,000 to avoid increasing taxes on people in that upper middle class earning range. It seems fairer and simpler to me to eliminate the cap and cut the tax rate slightly. This would give a small tax cut to everyone earning less than the $113,700 cap.

There are other ways to increase Social Security funding. One that has been suggested is to increase income taxes on high income individuals getting Social Security benefits and putting this revenue back into Social Security. Another is to use some of the revenue from the estate tax to fund Social Security. There are other options, but raising or eliminating the cap on earnings subject to the Social Security tax is the simplest and most straight forward solution to Social Security’s long-term funding shortfall. (See my post Social Security: Facts and Fixes of 12/4/11 for more information. https://lippittpolicyandpolitics.org/2011/12/04/social-security-facts-and-fixes/)

[1] McAuliff, M., 11/18/13, “Elizabeth Warren: Expand Social Security,” The Huffington Post

[2] Krugman, P., 11/21/13, “Expanding Social Security,” The New York Times

THE RETIREMENT CRISIS AND SOCIAL SECURITY

ABSTRACT: There is a retirement crisis in America. Both current and soon-to-be retirees are more dependent on Social Security than ever, yet some politicians and corporate executives are arguing that Social Security should be cut. Senator Elizabeth Warren of Massachusetts recently gave a speech in the Senate where (in only five and a half minutes) she did an excellent job of summarizing the retirement crisis and making the case for strengthening Social Security (http://ourfuture.org/20131118/elizabeth-warren-on-social-security-its-values-not-math).

Retirees’ reliance on Social Security is only going to increase because the other two legs of the three-legged retirement security stool, pension plans and personal savings, have been weakened. With Social Security as the only strong leg of retirement security, this is not the time to be reducing its benefits.

Given that 70% of Americans indicate in polls that they oppose Social Security cuts and 65% support increasing benefits, who is pushing for these cuts? Many Republicans are ideologically opposed to social welfare programs and cuts to Social Security are in the Republican budget. President Obama and some Democrats have signed on to the idea of the cuts as a compromise in pursuit of a “Grand Bargain” to resolve the federal budget’s deficit.

Prominently promoting the cuts in Social Security benefits have been two groups of corporate executives: the Business Roundtable and Fix the Debt. There’s great irony here from two perspectives. First, the corporate executives on the Business Roundtable have retirement accounts worth $14.5 million on average. Second, if the current Social Security tax cap were eliminated, corporate executives with $10 million in income, for example, would pay $1.24 million into Social Security instead of $14,000 and Social Security’s future funding problem would disappear.

Bills have been introduced in Congress to strengthen Social Security and its benefits. I encourage you to contact your Senators and Representative to ask them where they stand on Social Security cuts and these bills.

FULL POST: There is a retirement crisis in America. Both current and soon-to-be retirees are more dependent on Social Security than ever, yet some politicians and corporate executives are arguing that Social Security should be cut. This makes no sense from a budget perspective or a retirement policy perspective. There are bills currently in Congress to strengthen Social Security, by improving both its finances and its benefits, without any impact on the federal budget or the deficit. [1]

Senator Elizabeth Warren of Massachusetts recently gave a speech in the Senate where (in only five and a half minutes) she did an excellent job of summarizing the retirement crisis and making the case for strengthening Social Security. I encourage you to listen to her speech at http://ourfuture.org/20131118/elizabeth-warren-on-social-security-its-values-not-math.

Although the average recipient gets less than $15,000 a year from Social Security, many seniors are highly dependent on it. For 36% of seniors, Social Security is 90% of their income and for two-thirds of seniors, Social Security is more than half of their income. The current poverty measure indicates that 9% of seniors live in poverty, but an updated measure that most experts consider more accurate puts that figure at almost 15%. [2] Cutting Social Security benefits would clearly increase poverty among seniors.

Retirees’ reliance on Social Security is only going to increase because the other two legs of the three-legged retirement security stool, pension plans and personal savings, have been weakened. Only 18% of private sector workers have pensions (which pay a guaranteed monthly benefit for life as Social Security does). In 1975, 50% of workers had pensions. A combination of factors including expanded foreign trade and competition, along with weakened unions (which had made pensions a standard part of workers’ benefits) contributed to this dramatic decline in pensions.

Personal retirement savings are relatively small and have been hurt by the economic collapse, which cut the value of homes (where the middle class had most of its savings) and the value of investments. Some employers have replaced pension plans with personal savings accounts such as 401ks. However, only half of workers have such accounts and 80% of those accounts have less than $67,000 in them. [3]

With Social Security as the only strong leg of the three-legged stool of retirement security, this is not the time to be reducing its benefits. Given the current state of affairs, 53% of workers are at risk for having a lower standard of living in retirement than they had while working. And this percentage is up from 38% in 2001.

Given that 70% of Americans indicate in polls that they oppose Social Security cuts and 65% support increasing benefits, [4] why is there a push to cut Social Security benefits? The only reason that seems to make any sense is that those pushing a cut are ideologically opposed to Social Security – and often to social welfare programs in general.

So specifically who is pushing for these cuts? As mentioned above, it is in the Republican budget and reflects many Republicans’ ideological opposition to social welfare programs. President Obama and some Democrats have signed on to the idea of the cuts as a compromise in pursuit of a “Grand Bargain” to resolve the federal budget’s deficit.

Prominently promoting the cuts in Social Security benefits have been two groups of corporate executives: the Business Roundtable and Fix the Debt (a project of The Committee for a Responsible Federal Budget). These groups have been spending tens of millions of dollars on campaigns to build support for cutting Social Security (and Medicare, our health insurance program for seniors). There’s great irony here from two perspectives. First, the corporate executives on the Business Roundtable have retirement accounts worth $14.5 million on average. That would generate a monthly retirement check of over $86,000 compared to the typically monthly Social Security check of $1,237. [5] Second, the current Social Security tax (Social Security’s dedicated and only funding source) is only paid on the first $113,700 of earnings. Amounts above that are untaxed. If this Social Security tax cap were eliminated, corporate executives with $10 million in income, for example, would pay $1.24 million into Social Security instead of $14,000 and Social Security’s future funding problem would disappear.

Bills have been introduced in Congress to strengthen Social Security and its benefits. The Keeping Our Social Security Promises Act has been introduced in the Senate by Senator Sanders (S.1558) and in the House by Representative DeFazio. The Strengthening Social Security Act has been introduced in the Senate by Senator Harkin (S.567) and in the House by Representative Sanchez (H.R.3118). I encourage you to contact your Senators and Representative to ask them where they stand on Social Security cuts and these bills. [6]

[1] Sargent, G., 11/5/13, “Liberal push to expand Social Security gains steam,” The Washington Post

[2] Krugman, P., 11/21/13, “Expanding Social Security,” The New York Times

[3] Democracy for America, 11/24/13, “Expand Social Security,” http://act.democracyforamerica.com/sign/social_security_infographic/?source=ptnr.ssw_ssinfo.20131105 (You can get more information and sign their petition to support expanding Social Security here.)

[4] Alman, A., 11/19/13, “Voters in key states really don’t want Social Security cut,” The Huffington Post

[5] Anderson, S., 11/21/13, “CEOs against grandmas,” Daily Times Chronicle

[6] You can find contact information for your US Representative at http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

STARVING AMERICA

ABSTRACT: On November 1, federal food assistance to poor Americans was cut by $5 billion. The $78 billion Food Stamps program, officially known as the Supplemental Nutrition Assistance Program (SNAP), currently serves 48 million low income Americans, including 21 million children. This reduction in food assistance from the federal government is equal to the amount donated to churches, synagogues, and private food banks.

A family of four receiving the maximum amount will have their benefit fall from $668 to $632 per month. It is estimated that the typical SNAP beneficiary will receive $1.40 per meal. The Institute of Medicine found that the SNAP allotment, which is critically important for nutrition and health for both adults and children, was inadequate even before this cut.

The number of Americans receiving SNAP benefits has increased mainly due to the large number of people who lost jobs during the Great Recession. In addition, many Americans in low wage and / or part-time jobs qualify for Food Stamps.

Food, obviously, is a necessity and SNAP’s food stamps are a vital support for poor families with children, low income seniors, some people with disabilities, and some unemployed workers. Nonetheless, Congress actually wants to cut food assistance even more! This cut and the additional cuts being discussed will cause real harm to recipients by reducing a meager but essential support. There are many better and fairer ways to cut spending or increase revenue so these cuts to SNAP can be avoided.

FULL POST: On November 1, federal food assistance to poor Americans was cut by $5 billion. The $78 billion Food Stamps program, officially known as the Supplemental Nutrition Assistance Program (SNAP), currently serves 48 million low income Americans, including 21 million children. The cut is caused by the expiration of supplemental funding from the 2009 stimulus package. Although many politicians had pledged to extend this funding if it was still needed, that has not happened. On top of the hardships of the Great Recession and a weak recovery, this is another blow to people who are already among the most vulnerable citizens in our nation. [1]

Despite its significant impact on households that struggle to put food on the table, this event received scant attention in the mainstream, corporate media. This reduction in food assistance from the federal government is equal to the amount donated to churches, synagogues, and private food banks, according to a study by the Washington-based anti-hunger advocate Bread for the World. [2]

SNAP benefits will be cut by about 5.5%. A family of four receiving the maximum amount will have their benefit fall from $668 to $632 per month. It is estimated that the typical SNAP beneficiary will receive $1.40 per meal. [3] The Institute of Medicine found that the SNAP allotment, which is critically important for nutrition and health for both adults and children, was inadequate even before this cut. The cut means that nutrition will suffer and more families will run out of food by the end of the month. And more families will be in poverty because in 2012 SNAP lifted 4 million people above the poverty line ($18,300 for a family of 3, which often is a single mother with 2 children), making it one of the most effective anti-poverty programs we have. [4]

The $5 billion SNAP cut will have an effect on the overall economy. It is projected to slightly reduce our slow economic growth (from 2.0% to 1.9%) and has retail food stores and other consumer outlets worried about reduced sales. It is estimated that every $1 of Food Stamp benefits generates $1.74 of economic activity. [5]

The number of Americans receiving SNAP benefits has increased to roughly 48 million from about 26 million in 2007. This growth is mainly due to the large number of people who lost jobs during Great Recession, and especially those who either didn’t qualify for unemployment benefits or whose benefits have run out due to long-term unemployment. (Fewer than half of unemployed workers are currently receiving unemployment benefits.) In addition, many Americans in low wage and / or part-time jobs qualify for Food Stamps, including many workers at our large fast food corporations and at Walmart. (See my post of 10/30/13, Lack of Good Jobs is our Most Urgent Problem, for more information: https://lippittpolicyandpolitics.org/2013/10/29/lack-of-good-jobs-is-our-most-urgent-problem/.)

SNAP is a Department of Agriculture program and historically has been part of the Farm Bill. Renewal of the Farm Bill is currently stalled in Congress, in part over differences in how much more to cut SNAP. (That’s not a typo; Congress actually wants to cut food assistance even more!) House Republicans are proposing additional cuts of about $4 billion a year that would remove about 3 million people from the program, while Senate Democrats would cut one tenth of that, or $400 million a year. The Farm Bill also includes subsidies to multi-billion dollar agricultural corporations, billionaire investors in farms, and 14 members of Congress. However, these subsidies apparently won’t be cut; they will continue or increase. [6][7]

Food, obviously, is a necessity and SNAP’s food stamps are a vital support for poor families with children, low income seniors, some people with disabilities, and some unemployed workers. This cut that went into effect on November 1 and the additional cuts being discussed as part of the Farm Bill are tiny amounts in terms of the overall federal budget but will cause real harm to recipients by reducing a meager but essential support. There are many better and fairer ways to cut spending or increase revenue so these cuts to SNAP can be avoided. [8]

[1] Kaufmann, G., 10/28/13, “This Week in Poverty: No Time to Wait on a Movement,” The Nation

[2] Wallbank, D., & Bjerga, A., “Wal-Mart to widows will feel U.S. Food Stamp cuts,” Bloomberg

[3] Dayen, D., 11/6/13, “The Democrats’ original Food-Stamp sin,” The American Prospect

[4] Kaufmann, G., 10/28/13, see above

[5] Rampell, C., 10/31/13, “As cuts to Food Stamps take effect, more trims to benefits are expected,” The New York Times

[6] Alman, A., 7/23/13, “George Miller Criticizes House Republicans Over Farm Subsidies,” The Huffington Post

[7] Nixon, R., 11/7/13, “Billionaires Received U.S. Farm Subsidies, Report Finds,” The New York Times

[8] Weinstein, D., 11/6/13, “Time to tell the truth about Food Stamps,” The Huffington Post

CORPORATIONS’ TAX AVOIDANCE

ABSTRACT: Large corporations are dodging taxes by using offshore tax havens. They use them to avoid paying about $90 billion a year in US income taxes. Of the 100 largest US corporations with publicly traded stock, 82 maintain subsidiaries in offshore tax havens and they are holding $1.2 trillion in them, on which they have avoided paying US income tax. If all 82 of these corporations reported their $1.2 trillion stashed offshore as US income and paid the 35% rate, the federal government would receive $420 billion, which would cut the deficit by more than half.

For the 2010 tax year, profitable US corporations that filed a US income tax return paid an average of only 13% of their worldwide profits in income tax, despite the stated US corporate income tax rate of 35%.

The loss of this revenue for the federal government hurts all of us. It means that we, as individual taxpayers, and small businesses either have to pay more taxes to make up the difference or that our federal government (and state governments too) have less to spend on things we count on government to do.

Closing this offshore tax haven loophole would be a step toward tax fairness. There are bills in Congress to do so. I urge you to contact your Senators and Representative to urge them to support closing the offshore tax haven loophole.

FULL POST: Large corporations are dodging taxes by using offshore tax havens. They use them to avoid paying about $90 billion a year in US income taxes. This costs the US government more than was saved ($85 billion a year) by the ill-conceived, across-the-board budget cuts in March (known as the sequester) and far more than the proposed cut in food stamps (known as SNAP) would save ($4 billion a year). (See posts of 9/16 and 9/19 for some of the effects of the sequester.)

Of the 100 largest US corporations with publicly traded stock, 82 maintain subsidiaries in offshore tax havens and they are holding $1.2 trillion in them, on which they have avoided paying US income tax. Fifteen corporations hold two-thirds of this cash in 1,900 subsidiaries. [1] Many of these subsidiaries are officially housed in the Cayman Islands where the corporations maintain a legal address but no other physical presence. Ironically, roughly half of this offshore money is invested in US securities or through US accounts. [2]

In part because of the use of these offshore tax havens and accounting tricks that shift income to them, for the 2010 tax year, profitable US corporations that filed a US income tax return paid an average of only 13% of their worldwide profits in income tax. Even when state, local, and foreign income taxes are included, they paid only around 17% of profits, despite the stated US corporate income tax rate of 35%. [3] (See post of 11/5/11 for more information on corporate income taxes.)

A few specific examples help to put this in perspective.

Pfizer, the world’s largest drug maker, has 40% of its sales in the US but reported no taxable income in the US over the last 5 years. It has $73 billion sitting untaxed in 172 subsidiaries in offshore tax havens.
Microsoft has an untaxed $61 billion in 5 offshore tax havens.
Citigroup, which US taxpayers bailed out during the 2008 financial collapse, has $43 billion sitting untaxed in 20 offshore subsidiaries. [4]
Apple Computer made $30 billion in supposedly offshore profits over the past 4 years on which it paid no taxes to any national government, largely by exploiting technicalities in US and Irish tax laws. [5]
The Bank of America, also bailed out by US taxpayers during the 2008 financial collapse, has $17 billion sitting untaxed in 316 offshore subsidiaries.
Oracle has an untaxed $21 billion in 5 offshore subsidiaries.
Google has $33 billion sitting untaxed in 25 offshore subsidiaries. [6]

If these 7 corporations reported this $278 billion as US income and paid the 35% tax rate on it, the federal government would receive $97 billion. This would be more than enough to reverse the sequester’s cuts and continue food stamp benefits. If all 82 of the largest corporations with offshore tax haven subsidiaries reported their $1.2 trillion stashed offshore as US income and paid the 35% rate, the federal government would receive $420 billion, which would cut the deficit by more than half.

The loss of this revenue for the federal government hurts all of us, including small and local businesses. It means that we, as individual taxpayers, and small businesses either have to pay more taxes to make up the difference or that our federal government (and state governments too) have less to spend on education and job training, transportation and other infrastructure, safety and security, and all the other things we count on government to do.

Closing this offshore tax haven loophole would be a step toward tax fairness. There are bills in Congress to do so: in the US Senate, the Cut Unjustified Tax (CUT) Loopholes Act (bill # S.268) and in the US House, the Stop Tax Haven Abuse Act (bill # H.R. 1554). I urge you to contact your Senators and Representative to urge them to support closing the offshore tax haven loophole.

(You can find out who your Congress people are and get their contact information at: http://www.senate.gov/general/contact_information/senators_cfm.cfm for your Senators and http://www.house.gov/representatives/find/ for your Representative.)

[1] US PIRG, 7/31/13, “Offshore shell games,” (http://www.uspirg.org/reports/usp/offshore-shell-games)

[2] Clark, K., 10/4/13, “Crackdown on offshore tax havens,” Daily Times Chronicle

[3] US General Accounting Office, May 2013, “Corporate income tax: Effective tax rates can differ significantly from the statutory rate,” (http://www.gao.gov/products/GAO-13-520)

[4] MASSPIRG, 4/4/13, “Picking up the tab,” (http://masspirg.org/reports/map/picking-tab-2013)

[5] The Balance Sheet, 5/21/13, “Apple slips through $30 billion tax-code hole,” The American Prospect

[6] US PIRG, 7/31/13, see above

WHY IS THE GOVERNMENT SHUTDOWN?

ABSTRACT: The federal government’s shutdown for lack of a budget has nothing to do with the deficit or democracy; rather, it has everything to do with politics, ideology, and the tyranny of a minority. The extreme wing of the Republican Party, without the support in Congress to pass legislation and having lost the last election, is trying to impose its ideology on the country by taking the government’s budget hostage.

The federal government’s budget deficit is at its lowest level in 5 years and roughly half of what it was in 2009. The Republicans’ primary policy target is the Affordable Health Care law, also known as Obama Care. They ideologically oppose this expansion of the government’s role in health care, even though it is built on conservative principles and will provide health insurance to tens of millions of Americans who don’t have it now.

There’s a bill sitting in the House that funds the government for a few weeks – a so-called Continuing Resolution (CR). With a simple yes or no vote, it would pass. But because it doesn’t have the support of the majority of Republicans, Speaker Boehner won’t allow a vote on it.

800,000 federal employees will lose their paychecks and millions of Americans will lose services funded by the government. Nonetheless, members of Congress will continue to get their paychecks and their good, taxpayer-subsidized health insurance.

As recent history has shown, if the extremists in Congress get what they want, or any part of it, they’ll just be back at the next opportunity, creating another crisis, and asking for more. Therefore, negotiation with this extortion, blackmail, hostage taking, or bullying, whatever you want to call it, should not and cannot be undertaken.

FULL POST: The federal government’s shutdown for lack of a budget has nothing to do with the deficit or democracy; rather, it has everything to do with politics, ideology, and the tyranny of a minority. The extreme wing of the Republican Party, without the support in Congress to pass legislation and having lost the last election, including the presidency and seats in both houses of Congress, is trying to impose its ideology on the country by taking the government’s budget hostage.

This extreme faction is not willing to abide by the last election, by legislation previously passed (such as the Affordable Care Act), or by the will of the American public. And they are not willing to engage in meaningful negotiations because they believe they know what is best for the country and for all of us. They are willing, however, to disrupt the lives of millions of Americans and to harm our weak economic recovery by shutting down the federal government.

And this is not about the deficit. The federal government’s budget deficit is at its lowest level in 5 years and roughly half of what it was in 2009. [1] The deficit is projected to continue to fall as the economy recovers, which increases government revenue and reduces expenses. Many economists expect that in 2 years it will have decreased to a sustainable level. [2]

The Republicans’ primary policy target is the Affordable Health Care law, also known as Obama Care. They ideologically oppose this expansion of the government’s role in health care, even though it is built on conservative principles: 1) it uses private health insurers and providers, and 2) it requires personal responsibility through the mandate that individuals purchase health insurance (an idea born in a conservative think tank). They oppose it despite the fact that it will provide health insurance to tens of millions of Americans who don’t have it now, and the fact that the more the public knows about Obama Care’s specific provisions, the more they like it. (See my posts of 8/21/13 and 8/19/13 for more information.)

Various budget proposals from the Republicans identify their other policy targets. They have included cuts to other social programs that their extreme wing opposes, including cuts to Social Security, the Medicare and Medicaid health programs, and food and nutrition assistance, among others. On the other hand, most of them would increase military spending on top of its significant increases in recent years, which already mean that we are spending more on the military (adjusted for inflation) than at any time since World War II. [3]

The Republicans in the House of Representatives, who are the roadblock to passage of a budget, are refusing to bring to a vote any budget that does not have the support of a majority of Republicans. Therefore, the most extreme 117 Republicans in the House, 27% of its overall membership, can and are blocking progress and forcing this shutdown. (See post of 7/27/13 for more information on obstructionism in the House.)

There’s a bill sitting in the House that funds the government for a few weeks – a so-called Continuing Resolution (CR). It’s simple and straightforward; it simply funds the government at current levels without making any policy changes. If the Republican leadership in the House would allow a simple yes or no vote on this bill, it would pass with support from members of both parties – as it did in the Senate. But because it doesn’t have the support of the majority of House Republicans, Speaker Boehner won’t allow a vote on it.

800,000 federal employees will lose their paychecks and millions of Americans will lose services funded by the government, including meals for seniors, Head Start classes for preschoolers, and access to national parks for all of us. Nonetheless, members of Congress will continue to get their paychecks and their good, taxpayer-subsidized health insurance.

This is the second time in 20 years that an extreme Republican agenda has forced a government shutdown. Democrats have never done this when they were in the minority or did not hold the presidency.

As recent history has shown, if the extremists in Congress get what they want, or any part of it, they’ll just be back at the next opportunity, creating another crisis, and asking for more. Therefore, negotiation with these extortionists, blackmailers, hostage takers, or bullies, whatever you want to call them, should not and cannot be undertaken. [4]

Long before blocking Obama Care was linked to a government shutdown, Norm Ornstein, the political scientist at the conservative America Enterprise Institute, wrote that “What is going on now to sabotage Obamacare is not treasonous – just sharply beneath any reasonable standards of elected officials with the fiduciary responsibility of governing.” [5] I wonder what he would say now about those in Congress whose behavior has led to this government shutdown.

[1] Klimasinska, K., 9/12/13, “U.S. budget gap narrows as stronger growth boosts revenues,” Bloomberg

[2] Lowrey, A., 4/22/13, “The incredible shrinking budget deficit,” The New York Times

[3] Bilmes, L., 7/31/13, “Pentagon a ripe target for cuts,” The Boston Globe

[4] Reich, R., 9/30/13, “Why Obama and the Democrats shouldn’t negotiate with extortionists,” The Huffington Post

[5] Light, J., 7/25/13, “Obstructionism for the recordbooks,” Moyers & company (billmoyers.com/2013/07/25/obstructionism-for-the-recordbooks)

EFFECTS OF THE SEQUESTER Part 2

ABSTRACT: The $85 billion across the board budget cuts that went into effect on March 1, known as the sequester, are significantly affecting individuals, families, children, and public sector functions. The following list of some of the sequester’s effects is a continuation of my post of 9/16/13 and is drawn from the Coalition on Human Needs extensive compilation of reports from on-the-ground, front-line service providers and other sources.

The sequester’s budget cuts are having the following effects (among others): 1) the Center for Medicare and Medicaid Services is cutting its reimbursements to community cancer clinics for cancer treatment drugs below the actual cost of the drugs; 2) civilian medical staff at military medical facilities are losing significant income because of sequestration furloughs and therefore are quitting; 3) many school districts will be increasing class sizes, reducing instructional and non-instructional staff, reducing professional development and academic programs, and/or deferring textbook purchases; 4) 57,000 fewer children will participate in Head Start and Early Head Start, services will be reduced by 1.3 million days, and 18,000 staff will either be laid off or face reduced pay or hours; 5) the federal court system’s budget has been cut by $350 million leading to layoffs of public defenders, delays in trials, and cuts in mental health treatment, drug treatment and testing, and offender monitoring; 6) hundreds of thousands of low income mothers and their young children have lost nutrition benefits; 7) roughly 300,000 students with disabilities will receive reduced services; 8) Meals on Wheels has delivered hundreds of thousands fewer meals for tens of thousands of seniors; and 9) housing assistance has been cut or denied for tens of thousands of families.

FULL POST: The $85 billion across the board budget cuts that went into effect on March 1, known as the sequester, are significantly affecting individuals, families, children, and public sector functions. The following list of some of the sequester’s effects is a continuation of my post of 9/16/13. The Coalition on Human Needs has been compiling reports of the sequester’s effects from on-the-ground, front-line service providers, as well as from national reports and sources. Here are some “highlights” from their extensive compilation: [1]

The Center for Medicare and Medicaid Services is cutting its reimbursements to community cancer clinics for cancer treatment drugs below the actual cost of the drugs. As a result, the clinics have two choices: they can send Medicare patients to the hospital for treatment or they can continue to serve patients but take a loss on drug costs. Given tight budgets, many clinics are sending their patients to hospitals where taxpayers pay $6,500 more each year for cancer care and seniors pay $650 more in co-pays than they would at community cancer clinics.
Civilian medical staff at military medical facilities are losing significant income because of sequestration furloughs and therefore are quitting. The Army and Air Force combined have lost 3,300 doctors, nurses and other medical staff, about 6 percent of their total. Medical facilities’ hours of operation have been reduced and certain non-emergency medical procedures delayed.
The sequester’s cuts will affect many school districts this fall. In a survey of 541 school districts in 48 states done by the School Superintendents Association, 86% indicated they would be implementing cuts, including: increasing class sizes (48%), reducing instructional staff (53%), cutting non-instructional staff (47%), reducing professional development (59%), reducing academic programs (33%), and deferring textbook purchases (33%).
Due to the sequester’s cuts, 57,000 fewer children will participate in Head Start and Early Head Start this fall, the early education programs designed to close the school readiness gap for disadvantaged children. In addition, services will be reduced by 1.3 million days at Head Start centers and 18,000 staff will either be laid off or face reduced pay or hours. Programs also closed early at the end of the last school year, canceled summer programs, shortened daily hours of operation, and/or reduced services such as transportation. The concentration of Head Start services in poorer states and cities means that very poor communities and their children will be hit hard by these cuts, which will likely have life-long impacts on them and increase the challenges facing their schools.
The federal court system’s budget has been cut by $350 million by the sequester. This has resulted in layoffs of public defenders and furloughs of up to twenty days without pay. There have been delays in trials, reductions in lawyer training, and less funding for research, investigation and expert help. Several courts are not holding trials on Fridays to adapt to the reductions. If cases cannot be processed in accordance with the Speedy Trial Act, they may have to be dismissed. The number of federal probation officers has declined 7 percent since 2011, to approximately 6,000, despite an increase in the number of offenders in the probation system. In 2012, 187,000 offenders were supervised by these probation officers, and the number is expected to rise to a record 191,000 by 2014. Probation and pretrial services, including mental health treatment, drug treatment and testing, and offender monitoring, have all been cut.
The sequester’s cuts to food programs have meant that hundreds of thousands of low income mothers and their young children have lost nutrition benefits, which could do long-term harm to the health and school readiness of the children.
Hundreds of millions of dollars of sequester cuts mean that roughly 300,000 students with disabilities will receive reduced services.
Because of sequester cuts, Meals on Wheels has delivered hundreds of thousands fewer meals for tens of thousands of seniors. Transportation and other services for seniors have been cut.
Housing assistance has been cut or denied for tens of thousands of families due to the sequester. Some families have lost their housing assistance, some are being asked to pay more, and already long waiting lists and times (measured in years in many places) have grown. Maintenance of public housing and staff at housing agencies have been reduced.

I strongly urge you to call your US Senators and your Representative to tell them that the sequester’s budget cuts are harmful and unwise. Tell them that there are smarter and fairer ways to reduce the federal budget’s deficit.

[1] The Coalition on Human Needs’ extensive compilation of the sequester’s effects is available at: http://www.chn.org/wp-content/uploads/2013/08/completesetofsequesterreports.pdf.

EFFECTS OF THE FEDERAL BUDGET CUTS, AKA THE SEQUESTER

ABSTRACT: The $85 billion in federal budget cuts that went into effect on March 1 have now had time to have measurable effects. Most economists agree that the cuts, known as “the sequester,” have slowed economic growth by at least 1.5 percentage points. Joseph J. Minarik, an economist, cannot remember “when fiscal [i.e., federal budget] policy was so at odds with the needs of the economy.”

Effects of the sequester are having significant impacts on people’s lives, but continue to be ignored by Congress. The budget cuts are having the following effects (among others): In July, 199,000 federal workers had work hours reduced and contractors lost work; Federal court proceedings have been dramatically slowed and the number of federal law enforcement and probation officers has been reduced; The FBI will shut its headquarters and offices on 10 weekdays over the next year; The National Institutes of Health is cutting $4 million from the $9 million core contract for the Framingham Heart Study, one of the most important and unique research projects in medical history; The decline in federal money for scientific research has been exacerbated, leading 18% of scientists to consider taking their research to another country; The Coast Guard has cut patrols, training, and purchases of new equipment; and Efforts to remove unexploded land mines have been canceled or curtailed.

FULL POST: The $85 billion in federal budget cuts that went into effect on March 1 (which were part of the so-called “fiscal cliff”) have now had time to have measurable effects. Most economists agree that the cuts, known as “the sequester,” have hurt economic growth and the creation of jobs. They estimate that the reduced federal expenditures have slowed economic growth by at least 1.5 percentage points, with more harm to the economy and jobs expected if Congress and the President allow the cuts to continue.[1]

According to a recent NBC News/Wall Street Journal survey, 22% of Americans say they have been “significantly affected” by sequestration cuts. Among people earning below $30,000, 31% say they have been affected by the sequester. [2]

Joseph J. Minarik, economist and director of research at the corporate-supported Committee for Economic Development, says he cannot remember “when fiscal policy was so at odds with the needs of the economy.” Similarly, University of Michigan economist Justin Wolfers says, “The disjunction between textbook economics and the choices being made in Washington is larger than any I’ve seen in my lifetime. … At a time of mass unemployment, it’s clear, the economics textbooks tell us, that this is not the right time for fiscal retrenchment.” Given the consensus on this in the often fragmented economics profession, he adds, “To watch it be ignored like this is exasperating, horrifying, disheartening.” Warren Buffett, billionaire investment guru, stated that the sequester “is a stupid way to enact a cut in the budget.” [3]

The economic and jobs situations would be even worse if the Federal Reserve (the Fed) wasn’t taking aggressive actions to stimulate the economy (including holding interest rates extremely low) that offset some of the drag on the economy from federal budget cuts. However, it is likely the Fed will begin reducing one of its stimulus measures soon (the one known as quantitative easing).

As you may remember, the sequester’s cuts to air traffic controllers caused flight delays (that affected members of Congress as well as all the rest of us), so Congress acted with rarely seen speed to provide funding for them (see post of 4/30/13). However, other effects of the sequester, which are having far more significant impacts on people’s lives than having a flight delayed, continue to be ignored by Congress even as the real, measureable impacts are being felt. Given that the cuts were applied across the board, the range of effects have been broad. Here are some examples:

In July, 199,000 federal workers had work hours reduced and contractors lost work due to the sequester, thereby curtailing a wide range of services. [4] As workers’ incomes are reduced, some by as much as 30%, the impact ripples through the economy, stifling economic growth and job creation. These workers run the gamut from Internal Revenue Service (IRS) employees to public defenders in the federal court system to civilian employees of the military, many of them scientists, engineers, and medical staff. In Massachusetts alone, these cuts are expected to take $45 million out of the local economy. (Woolhouse, M., 7/22/13, “State feels pinch on federal workers,” The Boston Globe)
Federal court proceedings have been dramatically slowed and the number of federal law enforcement and probation officers has been reduced, jeopardizing public safety, according to an unusual letter to Congress signed by the chief judges of the trial courts in 49 states (every state except Nevada). (Sherman, M., 8/15/12, “Judges urge Congress to avoid more sequestration cuts,” The Washington Post)
The FBI will shut its headquarters and offices on 10 weekdays over the next year, leaving only a skeleton staff on duty. Off-duty employees will not be paid for these days. Given that personnel costs are roughly 60% of the agency’s budget, this was deemed the most effective way to cope with the sequester’s budget cuts. The FBI also has implemented a hiring freeze that means it has 2,200 vacant positions. Training has been substantially cut and no new vehicles are being purchased. There are concerns that employees will leave for better pay in the private sector, that investigations will be slowed, that domestic intelligence gathering will be harmed, and that the FBI’s capabilities will be degraded over the long-term. (Schmidt, M.S., 9/12/13, “F.B.I. plans to close offices for 10 days to cut costs,” The New York Times)
The National Institutes of Health is cutting $4 million from the $9 million core contract for the Framingham Heart Study, one of the most important and unique research projects in medical history. Over the past 65 years, data from the study has been used to develop and test technologies and treatments that have saved millions of lives and hundreds of billions of dollars in health care costs. The study has monitored the health, lifestyles, and medical treatments of 15,000 people and 100 of the original participants are still alive and being followed, as are multiple generations in some families. Thanks in part to the Framingham study, deaths from heart disease have been cut by more than 70 percent over the past four decades. The study was the first to link smoking and stress to heart disease and identify cholesterol and obesity as risk factors for heart problems. In fact, the very term “risk factor” or “factors of risk” was coined by Framingham researchers. The study will continue, but researchers will be laid off and participants will answer health questions by phone instead of having an in-person medical examination by a doctor. The ultimate effect on the study and the costs to our health and health care system in terms of discoveries delayed or never made is unknown. (Gellerman, B., 9/11/13, “Sequester Puts 65-Year-Old Framingham Heart Study In Jeopardy,” WBUR)
The decline in federal money for scientific research has been exacerbated and 67% of 3,700 scientists surveyed reported receiving less federal grant funding for their research than 3 years ago. 55% reported they have a colleague who has lost or is about to lose his or her job, and 18% reported they are considering taking their research to another country. (Steinstein, S., 8/30/13, “Nearly 20 percent of scientists contemplate moving overseas due in part to sequestration,” The Huffington Post)
The Coast Guard has cut patrols, training, and purchases of new equipment. (Gellerman, B., 8/6/13, “Coast Guard Pilots In Mass. Feel Sequester Pinch,” WBUR)
Efforts to remove unexploded land mines left behind in former warzones have been canceled or curtailed. (Bender, B., 8/3/13, “Home front impasse has distant victims,” The Boston Globe)

My next post will list additional effects of the sequester’s budget cuts.

[1] Calmes, J., & Rampell, C., 8/2/13, “U.S. Cuts Take Increasing Toll on Job Growth,” The New York Times

[2] O’Brien, M., Chuck, E., & Lamb-Atkinson, G., 7/29/13, “Ahead of budget battle, more Americans say sequester has hurt,” NBC News

[3] Calmes, J., & Rampell, C., 8/2/13, see above

[4] Calmes, J., & Rampell, C., 8/2/13, see above

GOVERNMENT AUSTERITY DEBUNKED

ABSTRACT: The argument for government austerity was largely built on two economic theories, both of which have been debunked recently by academia and reality. First was the theory that if government debt exceeded 90% of economic activity, then economic growth would be sharply lower. The second was that cutting spending in a depressed economy would create jobs.

The study the first was based on was dramatically discredited when an error was discovered in the Excel spreadsheet used to calculate its findings. Furthermore, the link highlighted between government debt and slow economic growth does not indicate that government debt causes slow growth; it could just as likely be the reverse.

The second theory was based on another academic study that was refuted by a 2010 study by the International Monetary Fund, which used better data. And finally, real life experiences in the US and Europe have not borne out what the austerity advocates predicted or promised.

Despite this debunking of the rationales for austerity, there hasn’t been any change in policies or political rhetoric in the US. The US austerity movement appears to be driven by small government ideologues who are using the economic crisis as an opportunity to push for cuts in social programs they’ve always opposed. There also appears to be an issue of class hiding behind austerity advocacy. While the years since the Great Depression and of austerity policies in Washington have been hard on the middle and lower classes, for the well off they’ve been pretty good. So, perhaps it shouldn’t be a surprise that the wealthy and political elites keep pushing austerity policies despite the lack of support from theory or reality.

FULL POST: The argument for government austerity – reducing the deficit by cutting spending and perhaps raising taxes – was largely built on two economic theories, both of which have been debunked recently by academia and reality. First was the theory that if government debt exceeded 90% of economic activity (measured by gross domestic product [GDP]), then economic growth would be sharply lower. The second was that cutting spending in a depressed economy would create jobs.

The first, on the danger of government debt, was based on a 2010 study by two Harvard economists, Reinhart and Rogoff, “Growth in a Time of Debt.” Despite significant controversy about it, its finding of a tipping point for reduced economic growth when government debt hit 90% of GDP was presented as fact by politicians and media arguing for the need for austerity. [1]

This study was dramatically discredited when an error was discovered by Thomas Herndon, a Ph.D. student at the University of Massachusetts, Amherst, in the Excel spreadsheet Reinhart and Rogoff used to calculate their findings. An error in one of their formulas had excluded data from Canada, New Zealand, and Australia, all of which had experienced strong economic growth in periods of high government debt. [2] (Reinhart and Rogoff have acknowledged the error.) This explained why other researchers, using similar data, hadn’t been able to replicate their findings. As Reinhart and Rogoff’s work was scrutinized, it was also criticized for omitting data and using questionable statistical procedures.

Furthermore, the link they highlighted between government debt and slow economic growth does not indicate that government debt causes slow growth; it could just as likely be the reverse, that slow growth leads to higher government debt. Indeed, the latter is clearly what happened in Japan in the early 1990s when government debt grew after the economy collapsed. [3]

The second theory, that cutting spending in a depressed economy would create jobs, was based on another academic study. It was refuted by a 2010 study by the International Monetary Fund (IMF), which used better data. The IMF study found that austerity reduced job growth instead of accelerating it as the original study and austerity promoters claimed. [4]

Finally, real life experiences in the US and Europe have not borne out what the austerity advocates predicted or promised. In the US, government debt and a bit of stimulus did not produce high interest rates and a shrinking economy. Most recently, the austerity measures adopted in March – namely the sequester’s budget cuts – are clearly causing jobs to be cut, with no signs of resultant job creation. Meanwhile, most of Europe is in recession despite consistent application of the austerity medicine for the last four years.

Despite this debunking of the rationales for austerity, there hasn’t been any change in policies or political rhetoric in the US, and little in Europe. This suggests that the austerity movement is not based on research and reality, but on ideology.

The US austerity movement appears to be driven by small government ideologues, given that the push for budget cuts continues unabated. These ideologues are using the economic crisis as an opportunity to push for cuts in social programs they’ve always opposed. They’ve seized on the austerity theories from academia as justification for their actions, and aren’t letting go of them even when they have been soundly discredited. [5]

There also appears to be an issue of class hiding behind austerity advocacy. The wealthy in the US regard the deficit as the most important problem we face and favor solving it by cutting spending on health care and Social Security. The middle and lower classes, although they see the deficit as a problem, view unemployment as a more important problem and want to see spending on health care and Social Security increase. [6] Given the political power of the wealthy elites, it’s not surprising to see policy bending to their preferences. While the years since the Great Depression and of austerity policies in Washington have been hard on the middle and lower classes (high unemployment, incomes that aren’t keeping up with inflation, home values that haven’t recovered to 2008 levels), for the well off they’ve been pretty good (incomes growing faster than inflation, corporate profits and stock prices surging). So, perhaps it shouldn’t be a surprise that the wealthy and political elites keep pushing austerity policies despite the lack of support from theory or reality.

[1] Krugman, P., 4/18/13, “The Excel depression,” The New York Times

[2] Roose, K., 4/18/13, “Meet the 28-year-old grad student who just shook the global austerity movement,” Daily Intelligencer

[3] Krugman, P., 4/18/12, see above

[4] Krugman, P., 5/3/13, “Playing whack-a-mole with expansionary austerity,” The New York Times

[5] Editorial, 5/5/13, “Blame ideologues, not economists for failed ‘austerity’ policies,” The Boston Globe

[6] Krugman, P., 4/15/13, “The 1 percent’s solution,” The New York Times

FIXING THE SEQUESTER’S BUDGET CUTS

ABSTRACT: The impacts of the $85 billion, 5% across the board budget cuts that went into effect on March 1^st (known as the Sequester) are being felt. The cuts to air traffic controllers caused flight delays, so Congress acted with rarely seen speed to provide funding for them.

However, other impacts of the sequester, which are having far more significant effects on people’s lives than having a flight delayed, are being ignored by Congress. It is estimated that almost 60,000 young children will lose or receive reduced Head Start and Early Head Start services. Grants for child care subsidies have been cut, which will undermine the ability of parents to work and the school readiness of an estimated 28,000 children. The estimated impacts of other cuts include: lost nutrition benefits for 600,000 mothers and their young children, reduced K-12 education supports for 1.2 million disadvantaged children, fewer meals for tens of thousands of seniors, and 4,000 fewer AmeriCorps and VISTA volunteers. Unemployment benefits, vouchers for rental housing assistance, and health care funding have also been cut.

I urge you to email, write, or call your representatives in Congress and the President to say that it’s nice to fix the sequester’s impact on flight delays, but it’s much more important to fix the significant, negative impacts the sequester is having on people’s daily lives, on our children and their education from birth onward, on seniors’ ability to live independently, and on the ability of low income families and the unemployed to make ends meet.

FULL POST: The impacts of the $85 billion, 5% across the board budget cuts that went into effect on March 1^st (known as the Sequester) are being felt. As you’ve probably heard, the cuts to air traffic controllers caused flight delays. So Congress acted with rarely seen speed and in just two days passed a bill that shifts money from airport improvement projects to provide funding for the controllers. The meat industry, the Pentagon, and the Homeland Security and Justice Departments also got some relief from the sequester’s cuts in the bill. [1]

However, other impacts of the sequester, which are having far more significant effects on people’s lives than having a flight delayed, are being ignored by Congress. Here are some examples: [2][3]

Early childhood care and education:
- Head Start and Early Head Start, which provide families in poverty with school readiness enrichment for children under 5 and other support, are cutting services. Some are closing early and some are shutting down for 2 – 3 weeks. Others are laying off staff and serving fewer children, with some conducting lotteries to determine which children will be asked to leave. This is potentially harmful to children’s brain development, which is likely to negatively affect their success in school and their ability to be productive workers in the future. Nationally, it is estimated that almost 60,000 young children will lose or receive reduced services.
- Grants to the states for child care subsidies have been cut. Therefore, states will offer less help to low income families to pay for child care. This will undermine the ability of parents to work and the school readiness of an estimated 28,000 children.
Nutrition for mothers and their young children: It is estimated that 600,000 low income mothers and their young children will lose nutrition benefits. This could do long-term harm to the health and school readiness of these children.
K-12 Education: School teachers, aides, and literacy and remedial specialists are being laid off. In particular, the Title I program that provides funding to schools serving high numbers of low income families has been cut by $726 million, which is estimated to affect 1.2 million disadvantaged students and 10,000 school staff members.
Unemployment benefits: The federal government advised states to cut their unemployment benefits to the long-term unemployed by 10.7% in the first week of April or make larger percentage cuts later. In California, for example, where unemployment is 9.6%, 400,000 long-term unemployed workers, whose average weekly check is $297, will receive a cut of $52 a week.
Housing: Vouchers for rental assistance are being cut. Some recently issued vouchers are being rescinded and some subsidized tenants are being asked to pay more toward their rent. Waiting lists and times (measured in years in many places) for housing assistance are growing. Tens of thousands of families will be affected.
Services for seniors: Transportation services for seniors are being cut and some senior centers are being closed. Meals on Wheels will deliver hundreds of thousands fewer meals for tens of thousands of seniors.
Health care: Local clinics, the most convenient and cost-effective places to get health care, are cutting services, forcing patients to travel longer distance to access more expensive services at hospitals. Hospitals and health care organizations will lose $11 billion this year. Non-profit hospitals that serve large Medicare populations will be disproportionately affected.
Community service: 4,000 of 80,000 AmeriCorps and VISTA volunteers will be cut.

The impacts of the sequester’s cuts to social and human service programs are difficult to quantify and describe because they are in numerous programs and grants, and are happening differently in each state, in each city, and in each agency and program as these entities struggle to implement the cuts with the least harm possible.

Meanwhile, Congress, including prominent deficit hawks, is insisting that the military spend almost half a billion dollars on tanks that the Pentagon doesn’t want to save 700 jobs at a General Dynamics plant in Ohio. General Dynamics, by the way, spent $11 million on lobbying last year. [4]

I urge you to email, write, or call your representatives in Congress and the President to say that it’s nice to fix the sequester’s impact on flight delays, but it’s much more important to fix the significant, negative impacts the sequester is having on people’s daily lives, on our children and their education from birth onward, on seniors’ ability to live independently, and on the ability of low income families and the unemployed to make ends meet.

[1] Grant, D., 4/16/13, “Before members rush for airports, Congress ends sequester flight delays,” The Christian Science Monitor

[2] Zero to Three, 4/26/13 and 4/8/13, “The sequester’s pain: Air travelers get relief, little kids not so much,” and “When babies share the burden – How the sequester is affecting young children,” Baby Policy Blog of Zero to Three

[3] Coalition on Human Needs, April, 2013, “Sequester impact factsheets,” http://www.chn.org/background/save-state-fact-sheets/

[4] Lardner, R., 4/29/13, “Army says no to tanks, but Congress insists,” Associated Press in Daily Times Chronicle

SOCIAL SECURITY AND CHAINED CPI

ABSTRACT: In his federal government budget, President Obama has proposed cutting future Social Security benefits. He has done so in a way that is probably meant to obscure this fact. The Social Security Administration estimates that the result would be a 5% cut in benefits over every 12 year period.

It would not reduce the annual deficit, because SS has its own, dedicated funding stream. Social Security (SS) does not have a major funding problem; its shortfall 20 years from now is easily remedied.

Therefore, it seems that the only reason President Obama is proposing this cut in SS benefits is to offer a political olive branch to Republicans who want to cut SS because they are ideologically opposed to it.

An average 77 year old is receiving $23,832 per year from SS. If chained CPI had been used over the last 12 years, this person would be receiving $22,560 instead. Despite the very modest level of income that SS provides, one-third of seniors rely on SS for at least 90% of their income and another third for over 50% of their income.

The use of chained CPI as the government’s new, official measure of inflation will also, over time, reduce low income families’ eligibility for benefits and push low and middle income taxpayers into higher income tax rate brackets. Thus, it will disproportionately hit low and moderate income families. This would be morally and ethically questionable in the best of times, but with low and middle income families still suffering from the effects of the Great Recession, and income and wealth inequality at levels unseen for at least 80 years, this is unconscionable.

I urge you to contact the President, your Senators, and your Congressperson in the House of Representatives and ask them to oppose this change – or to explain why they support it.

FULL POST: In his federal government budget, President Obama has proposed cutting future Social Security benefits. He has done so in a way that is probably meant to obscure this fact or at least muddy the waters so his proposal isn’t describe as a benefit reduction.

Obama has proposed that the annual inflation adjustment for Social Security (SS) benefits be calculated differently. Instead of using the current Consumer Price Index (CPI), he proposes using a figure called the “chained CPI.” [1] It gives a lower estimate of inflation than CPI, so benefits would increase more slowly. The Social Security Administration estimates that the result would be a 5% reduction in benefits over every 12 year period.

This would cut total SS payments by $10 – $20 billion per year over the next 10 years. However, it would not reduce the annual deficit (which is roughly $800 billion), because SS has its own, dedicated funding stream and is not part of the regular federal budget. Furthermore, SS does not have a major funding problem; its shortfall 20 years from now is easily remedied by other steps that don’t reduce future payments to retirees. (See posts of 1/7/13 and 12/4/11 for more details.)

An average 77 year old is receiving $23,832 per year from SS. If chained CPI had been used over the last 12 years, this person would be receiving $22,560 instead, $1,272 less or a little over a 5% reduction. [2]

Despite the very modest level of income that SS provides, one-third of seniors rely on SS for at least 90% of their income and another third for over 50% of their income. Chained CPI won’t keep up with the inflation that seniors actually experience, given the high portions of their incomes that go for the necessities of food and health care. [3]

And if that isn’t bad enough, remember that SS was meant to be one leg of a three legged stool of retirement security that included employer pension plans and personal savings. Employer pensions have disappeared for most workers and have, at best, been turned into personal savings plans, such as 401ks, where workers have all the risk, just like other personal savings. Given this, now is not the time to be cutting SS, the only guaranteed retirement benefit left in what is now a much less stable and riskier two legged stool.

The use of chained CPI as the government’s new, official measure of inflation will also, over time, reduce low income families’ eligibility for benefits and push low and middle income taxpayers into higher income tax rate brackets. For example, the federal poverty rate is adjusted annually for inflation. Using chained CPI, it will rise more slowly and, in the future, fewer families will fall below the poverty line, which is used to determine eligibility for programs from Head Start to health care, food, and heating assistance. The federal income tax brackets are also adjusted annually for inflation. With the cut off amounts for higher income tax rate brackets rising more slowly, more taxpayers will fall into higher brackets, increasing their income tax. This doesn’t affect the wealthy, of course, because they are already in the top bracket. [4]

The bottom line is that this change in the measure of inflation that is used to calculate Social Security benefits, eligibility for many anti-poverty programs, and income tax rate brackets will disproportionately hit low and moderate income families. This would be morally and ethically questionable in the best of times, but with low and middle income families still suffering from the effects of the Great Recession, and income and wealth inequality at levels unseen for at least 80 years, this is unconscionable.

In reality, this is a backdoor way to cut benefits for SS recipients and low income families, and to have low and middle income taxpayers pay more in income taxes – without having to say that’s what you’re doing. Obfuscation is the name of this game.

I urge you to contact the President, your Senators, and your Congressperson in the House of Representatives and ask them to oppose this change – or to explain why they support it.

[1] Chained CPI assumes that as the prices of goods and services rise, consumers substitute less costly alternatives. For example, if gas prices rise, consumers use their cars less or buy (usually smaller) cars that get better gas mileage. Or if the price of beef goes up, they buy less beef and more chicken or less meat overall. Or if the price of heating oil goes up, consumers turn down the heat and use electric space heaters to heat only the rooms in which they spend time. First, this sounds, in many cases, like a decline in one’s standard of living or quality of life. Second, in some cases buying a cheaper substitute isn’t really an option. When the cost of health insurance and health care goes up, there often isn’t a way to buy a less costly alternative. And for seniors, this is a big part of their budget.

[2] Matthews, D., 12/11/12, “Everything you need to know about Chained CPI in one post,” The Washington Post

[3] Warren, E., 4/10/13, Newsletter from Senator Elizabeth Warren

[4] Ohlemacher, S., 4/8/13, “Obama plan hits seniors, low-income taxpayers,” Associated Press (in the Reading Daily Times Chronicle)

THE SHRINKING DEFICIT

ABSTRACT: The federal government’s annual budget deficit is falling, and falling faster than at any time since WWII. Overall government spending has been falling since 2007. Roughly 750,000 government jobs have been cut since the recovery began in 2009, cancelling out much of the benefit of increased private sector employment, and leaving unemployment higher than it would be otherwise.

Many economists believe that an austerity strategy of a rapidly declining deficit and spending cuts such as the “sequester” could hurt the economy and its recovery. Europe is experiencing a second recession and very high unemployment (12%) due to its austerity strategy. The current, irrational obsession with the deficit is precluding investments that have a high return and would improve the fiscal picture over the long-term.

Ultimately, jobs and a strong economy are the answer to taming the deficit, which is already shrinking rapidly.

FULL POST: The federal government’s annual budget deficit is falling. And it’s falling faster than at any time since the end of World War II. And that’s even before the March 1 spending cuts (the “sequester”) are factored in. [1] The deficit for this year is projected by the Congressional Budget Office to be $845 billion, down from $1,100 billion last year and $1,413 billion in 2009. It grew in 2008 and 2009 because the Great Recession led to 1) a dramatic loss of tax revenue due to decreased economic activity and jobs; [2] 2) increased expenditures for unemployment, food assistance, and other government benefits that softened the impact of the recession on families; and 3) tax cuts that were used to stimulate the economy, reducing the depth of the recession. [3]

Overall government spending, including the federal, state, and local levels, has been falling since 2007. Although the decline in federal spending in the fourth quarter of 2012 is seen as the culprit in causing the economy to shrink (i.e., negative growth) in that quarter, spending reductions and job losses have been most pronounced at the state and local levels. Federal spending has declined from 25.2% of our total economy or Gross Domestic Product (GDP) in 2009 to 22.8% in 2012, and is projected to fall to 21.5% by 2017 without any dramatic changes in budget policy. (The 40 year average has been 21.0%.)

Roughly 750,000 government jobs have been cut since the recovery began in 2009. This has been a “massive drag on the economy,” cancelling out much of the benefit of increased private sector employment. [4] Although the US unemployment rate has fallen to 7.7%, it would have fallen significantly further if these government jobs, including those of many teachers, had not been lost.

Many economists believe that an austerity strategy of a rapidly declining deficit and spending cuts such as the “sequester” could hurt the economy and its recovery. Historically, rapidly falling government deficits and spending have tended to lead to recessions. [5] If you want evidence of this, you need look no further than Europe at this moment. Europe is experiencing a second recession and very high unemployment (12%) due to its austerity strategy. Mark Cliffe, chief economist at IMG, describes its austerity strategy as “a bit of a vicious circle. Europe is pursuing a policy that is self-evidently failing.” [6]

The current, irrational obsession with the deficit (rather than a focus on creating jobs and strengthening the economy), is precluding investments in infrastructure and other activities that have a high return on investment and would improve the fiscal picture over the long-term. Especially given the federal government’s ability to borrow money at near zero interest rates, now is an ideal time to make investments in the future strength and growth of our economy, which is the best long-term strategy for reducing the deficit. [7]

There isn’t a good answer to the question of why the deficit – which is already rapidly falling – is more important now than creating jobs and strengthening the economy. [8] And if we look at Europe, we can see clear evidence that an austerity strategy does not lead to a falling deficit or a stronger economy with more jobs. The only answer is ideology – a belief that a smaller public sector is more important than putting struggling Americans back to work and back on their feet.

Ultimately, jobs and a strong economy are the answer to taming the deficit and the overall accumulated debt. Furthermore, a focus on creating jobs would resonate with the American public, many of whom are still struggling with the impacts of the Great Recession. It’s a matter of delivering a clear message about the need to create jobs and stimulate the economy, and that this will solve the issue of the deficit, which is already shrinking rapidly.

[1] Klein, E., 2/12/13, “The deficit chart that should embarrass deficit hawks,” The Washington Post

[2] Raum, T., 2/22/13, see above

[3] Konczal, M., 1/22/13, “The most important graph on the deficit, “ The Roosevelt Institute

[4] Raum, T., 2/22/13, “Government downsizes amid GOP demands for more cuts,” Associated Press (in the Reading Daily Times Chronicle)

[5] Klein, E., 2/12/13, see above

[6] The Balance Sheet, 4/3/13, “Europe’s austerity addiction,” The American Prospect

[7] Summers, L., 1/21/13, “America’s deficits: The problem is more than fiscal,” The Washington Post

[8] Wolf, M., 1/22/13, “America’s fiscal policy is not in crisis,” Financial Times

NO FISCAL CLIFF FOR CORPORATE TAX LOOPHOLES

ABSTRACT: So you thought our Washington politicians were serious about reducing the deficit? Guess again. The actual bill that averted the “fiscal cliff” in January included 43 corporate tax breaks worth $67 billion in 2013, which is more than the revenue that was raised! This means that the “fiscal cliff” legislation did NOT decrease the deficit, but rather increased it. The tax breaks include: 1) $11 billion for corporations such as GE, Citicorp, and Ford on overseas earnings, 2) $430 million for Hollywood producers for filming in the US, 3) $331 million for railroads for track maintenance, 4) $500 million for pharmaceutical giant Amgen, and 5) $120 million for Whirlpool Corporation. The support for corporate tax loopholes is often bipartisan as they provide leverage for campaign contributions.

So, take with a big grain of salt all the talk about deficit reduction. Corporate welfare continues unabated while deficit reduction is used as an axe to cut government programs, many focused on helping low and middle income families. And take with a big grain of salt the talk about the need to cut Medicare and Medicaid spending when big giveaways to Amgen and other pharmaceutical corporations are costing these programs billions of dollars every year.

Note: I’m back to blogging after a three month hiatus. And no, unfortunately, this post is NOT an April Fool’s joke.

FULL POST: So you thought our Washington politicians were serious about reducing the deficit given the last minute “fiscal cliff” deal in January and the automatic spending cuts (“the sequester”) that went into effect on March 1? Guess again. Corporate tax loophole giveaways that were actually part of the “fiscal cliff” bill cost more than the revenue that was raised!

As background, the manufactured austerity crisis, known as the “fiscal cliff,” was a package of spending cuts and tax increases set to go into effect automatically on December 31, 2012, if a substitute agreement on deficit reduction wasn’t reached. (See post of 12/12/12 for more details.)

Early on New Year’s Day legislation was passed that supposedly tackled the deficit by increasing revenue. It also postponed the spending cuts until March 1. Most of the scheduled tax increases were scaled back, so only $30 – $60 billion per year in new revenue was generated. Income tax rates on individuals with incomes over $400,000 were increased, with some reductions in deductions starting at $250,000 in income. The estate tax was increased a bit and workers’ Social Security taxes were increased by 2% of wages on earnings up to $110,000. (This restored a temporary cut in the Social Security tax that was targeted at boosting the economy and middle and low income workers during the Great Recession.) (See post of 1/7/13 for more details.)

The postponed spending cuts ended up going into effect on March 1 because our politicians could not come to an agreement on other deficit reduction measures. These spending cuts are likely to hurt the economy, slowing the recovery and increasing unemployment. In addition, these cuts are hurting low and middle income families. Head Start’s high quality school readiness programs are serving fewer children – fewer 3 and 4 year olds from families in poverty. School systems are laying off teachers and staff. College students are losing government support. Housing authorities are laying off staff and cutting housing assistance to poor families. And there will be cuts in health care that will disproportionately affect low income individuals. [1]

Despite all of this, quietly, and with very little coverage by the mainstream (corporate) media, the actual bill that averted the “fiscal cliff” in January included 43 corporate tax breaks worth $67 billion in 2013, which is more than the revenue that was raised by the highly publicized tax increases. [2] This means that the “fiscal cliff” legislation did NOT decrease the deficit, but rather increased it by giving more in tax breaks to corporations than it raised in tax revenue from individuals!

For example, Whirlpool Corporation got a tax benefit worth an estimated $120 million in 2012 and 2013 after spending $1.8 million on lobbying over the last two years; a 6,700 percent return on investment. Whirlpool’s total income taxes paid to federal, local, and foreign governments for 2009 -2011 were a REFUND of $561 million! And it is carrying forward federal tax credits it can use to decrease its US taxes in future years. Meanwhile, Whirlpool closed a factory in Arkansas and laid off 800 workers, moving the manufacturing of its refrigerators to Mexico. This was part of an overall reduction of its workforce in North America and Europe of 5,000 jobs, which it announced in 2011. [3]

Another example was a provision in the “fiscal cliff” legislation that gave two years of relief from Medicare cost controls for certain drugs. Although not mentioned by name, the clear beneficiary is the pharmaceutical giant, Amgen. It is estimated that this loophole will cost taxpayers about $500 million over two years – to the benefit of Amgen. The company’s CEO quickly informed investment analysts of this good news. Two factors make this particularly egregious:

Amgen had already received a two year delay on these cost controls and another one is hard to justify
Two weeks earlier, Amgen had pleaded guilty in a major federal fraud case to illegal drug marketing and had agreed to pay $762 million in criminal and civil penalties

This particular case is tied to close relations Amgen has with three Senators: Max Baucus (D – Montana), Mitch McConnell (R – Kentucky), and Orrin Hatch (R – Utah). [4][5] As in this case, the support for corporate tax loopholes is often bipartisan. Many of them have to be renewed every two years. This gives members of Congress leverage for an on-going source of campaign contributions from these corporations and their lobbyists. The supposedly temporary nature of these corporate tax loopholes also avoids the accounting analysis, and resultant publicity, the federal budget process requires of permanent or longer-term tax expenditures. Overall, corporate welfare will cost the federal government at least $154 billion in 2013 through 135 individual provisions in the tax code. [6]

Other corporate tax breaks in the “fiscal cliff” legislation include:

$11 billion for corporations such as GE, Citicorp, and Ford on overseas earnings
$430 million for Hollywood producers for filming in the US
$331 million for railroads for track maintenance

[1] Coalition on Human Needs, 3/22/13, “Sequester Impact,” http://www.chn.org/wp-content/uploads/2013/03/sequester-impact-mar-13-21.pdf

[2] Rowland, C., 3/17/13, “Tax lobbyists help businesses reap windfalls,” The Boston Globe

[3] Rowland, C., 3/17/13, see above

[4] Moyers, B., & Winship, M., 1/25/13, “Foul play in the Senate,” Common Dreams

[5] Lipton, E., & Sack, K., 1/20/13, “Fiscal cliff bill benefits Amgen,” The New York Times

[6] Rowland, C., 3/17/13, see above

CUTTING SPENDING TO REDUCE THE DEFICIT Part 2

ABSTRACT: Medicare and Medicaid do present significant funding challenges. This is because they reflect the costs of our health care system, which spends 2 ½ times what other advanced economies spend on average – and our health outcomes are worse. Obamacare takes initial steps to make our whole health care system more cost effective. One proposal to save money in Medicare is to raise the age at which one is eligible for coverage from 65 to say 67. This would save only $13 billion per year over 10 years and would only shift the cost for health insurance somewhere else.

Cuts to Medicaid mean that fewer low income individuals, primarily low income children and seniors, would have health insurance.

It is unfair and unnecessary to cut services and benefits for low income families and seniors when other options for reducing the deficit are available.

FULL POST: Medicare and Medicaid do present significant funding challenges. This is because they reflect the costs of our health care system, which spends over $7,500 per person per year. This is 2 ½ times what other advanced economies spend on average – and our health outcomes are worse. (See post of 12/9/11 for more details.)

The real issue is the need to make our whole health care system more cost effective. Obamacare takes initial steps to do just that. It includes cuts in payments to Medicare health insurers and health care providers of $700 billion, requiring them to be more efficient, but not cutting any benefits to seniors. Nonetheless, during the 2012 campaigns, Republicans attacked this as a cut to Medicare, despite the fact that their Vice Presidential candidate, Paul Ryan, the chairman of the House Budget Committee, had included these cuts in his budget the previous two years. Ironically, Republicans have also taken steps to eliminate the cost control board created by Obamacare that is charged with limiting the growth of Medicare spending. [1]

President Obama has continued his efforts to reduce Medicare costs by proposing giving Medicare the right to negotiate with drug makers for lower prices. [2] The Veterans Administration and large health insurers already do this and save significant amounts of money, but President Bush’s Medicare drug benefit prohibited Medicare from doing so, providing a windfall to the pharmaceutical corporations.

Another proposal to save money in Medicare is to raise the age at which one is eligible for coverage from 65 to say 67 and increase premiums for high income recipients. The Congressional Budget Office reviewed these proposals and concluded that they would save only $13 billion per year over 10 years. Moreover, increasing the eligibility age would only shift the cost for health insurance somewhere else and would leave some people without health insurance.

Cuts to Medicaid mean that fewer low income individuals would have health insurance or that their benefits would be cut. Medicaid beneficiaries are primarily low income children and seniors, with Medicaid paying for many seniors’ nursing home care. An expansion of Medicaid is an essential part of reducing the number of Americans without health insurance under Obamacare.

It is unfair and unnecessary to cut services and benefits for low income families and seniors when other options for reducing the deficit are available. Despite our riches, the US is less generous in its benefits for seniors and low income families than other countries with advanced economies. Surely, we can find the will and a way to maintain, if not improve, our benefits for these members of our society.

[1] New York Times editorial, 11/18/12, “A bad idea resurfaces,” The New York Times

[2] Krugman, P., 12/3/12,“The GOP’s big budget mumble,” The New York Times

CUTTING SPENDING TO REDUCE THE DEFICIT

ABSTRACT: A deal was reached to address the year-end “fiscal cliff” or austerity crisis. Spending cuts were postponed for two months and most of the tax increases were eliminated, while some tax and revenue increases were enacted. The deficit reduction focus will now largely shift to spending cuts. We should be focusing on job creation and strengthening the economy, but somehow the deficit is the hot topic.

The discussion of spending cuts will probably focus on the military and on entitlement programs, specifically Social Security and the health care programs, Medicare and Medicaid. Much of the discussion of cutting military spending will be on avoiding cuts. However, military spending can be reduced up to $200 billion per year – without jeopardizing national security.

Turning to calls for cuts in Social Security and our public sector health programs, keep in mind that every other advanced economy has health care for all and a retirement support system. Social Security has its own funding stream and does not contribute to the deficit, so rationally it shouldn’t be part of this discussion. Ideologues are using the deficit issue to target Social Security because of their doctrinaire opposition to it. Minor changes to its funding would cover benefits for the next 75 years.

My next post will review proposed cuts to Medicare and Medicaid.

FULL POST: As you probably know, a deal was reached to address the year-end “fiscal cliff” or austerity crisis. Spending cuts were postponed for two months and most of the tax increases were eliminated, while some tax and revenue increases were enacted. The cap on the US government’s debt was not addressed and will be hit in about two months. Here’s a quick summary of what was enacted: [1]

Income tax rates on incomes over $400,000 will increase from 35% to 39.6% and some reductions in deductions will start at $250,000 in income, but there is no “Buffett Rule” requiring 30% be paid on incomes over $1 million. The net result is that new revenue from income taxes will be only about $60 billion per year as opposed to up to $450 billion with the rates increased on incomes over $250,000 and the “Buffet Rule”.
The Social Security payroll tax reduction was NOT extended, so all workers will have an additional 2% taken out of their paychecks on earnings up to $110,000.
Tax benefits for low income households were extended: a child credit and the Earned Income Tax Credit, which supplements income from low paying jobs. The tuition credit was extended as was the corporate research and development credit. The Alternative Minimum Tax, which originally was to function like the “Buffett Rule”, was adjusted so it won’t affect middle income taxpayers.
Unemployment benefits for the long-term unemployed were extended for a year.
The estate tax was increased slightly but not nearly as much as some had proposed and only on individual estates of over $5 million or joint estates of over $10 million.

The deficit reduction focus will now largely shift to spending cuts. We should be focusing on job creation and strengthening the economy, given high unemployment and slow economic growth, but somehow the deficit is the hot topic. As the current experience in Europe is clearly showing, cutting government spending weakens the economy and job growth and can put countries back into a recession.

Having said that, the discussion of spending cuts will probably focus on the military and on entitlement programs, specifically Social Security and the health care programs, Medicare (for seniors) and Medicaid (for low income people including low income seniors).

Unfortunately, much of the discussion of cutting military spending will be on avoiding cuts, including the $50 billion per year cut that is now scheduled for March 1. Military spending can be reduced this much and more – up to $200 billion per year – without jeopardizing national security. (See blog posts of 9/29/12 and 11/17/11 for more information.) For example, Lawrence Korb, an assistant defense secretary under President Reagan, has itemized $150 billion in annual cuts to the military budget. [2]

In the recently enacted $633 billion Defense Department spending bill, there was widespread criticism of inclusion of unnecessary spending. The dollar amount was more than the Department or President requested. The Pentagon complained that it is required to keep weapons, as well as bases and units, that are not needed or efficient. Defense Secretary Panetta decried meddling by Congress that required “excess force structure and infrastructure.” [3][4]

Turning to calls for cuts in Social Security and our public sector health programs, keep in mind that every other advanced economy has health care for all and a retirement support system. So the issue is not whether it is possible to have these programs, it is are we willing to pay for them and are we willing to control health care costs.

Social Security has its own funding stream and does not contribute to the deficit, so rationally it shouldn’t be part of this discussion. Ideologues are using the deficit issue to target Social Security because of their doctrinaire opposition to it. Furthermore, its current funding will cover its benefits for roughly the next 20 years and after that minor changes to its funding would cover benefits for the next 75 years without any cuts in benefits. (See post of 12/4/11 for more details.)

The most prominent proposal for cutting Social Security spending is to reduce the annual increase in benefits that adjusts for inflation. This would save less than $20 billion per year over 10 years. [5] Ask any senior you know if the inflation adjustment is sufficient to keep up with their cost of living and I bet they’ll say, “No.” So cutting this will only hurt our seniors and reduce Social Security’s ability to keep seniors out of poverty. Furthermore, Social Security has become an increasingly important part of retirement income as private sector pensions have largely disappeared; cutting its rather modest benefits seems inappropriate in this environment.

My next post will review proposed cuts to Medicare and Medicaid.

[1] New York Times, 1/1/13, “Highlights of the agreement,” The Boston Globe

[2] Dubose, L., 11/15/12, Book review of Ralph Nader’s “The seventeen solutions: Bold ideas for our American future,” The Washington Spectator

[3] Bender, B., 1/5/13, “A reprieve for local military bases: New Congressional funding flouts Pentagon’s plan for cutbacks,” The Boston Globe

[4] Boston Globe Political Notebook, 12/21/12, “House approves defense bill despite Pentagon objections,” The Boston Globe

[5] Krugman, P., 12/3/12, “The GOP’s big budget mumble,” The New York Times

REBUTTING ARGUMENTS AGAINST INCREASING INCOME TAXES ON THE WEALTHY

ABSTRACT: The Bush tax cuts, and the even larger cuts in the income tax rates for high incomes over the last 30 years, have contributed to creating the federal government’s deficit (see post of 12/22/12) and to dramatically widening income and wealth inequality in the U.S. There has been a dramatic shift of the tax burden from the well-off and corporations to middle and lower income households. This shift in the tax burden has contributed to stagnant incomes for middle and lower income earners while incomes at the top have skyrocketed.

Despite the Republican rhetoric that high income individuals are “job creators,” the fact is that increased income for them is far less effective in stimulating job growth than increased incomes for low and middle income individuals. There is strong evidence, from multiple perspectives, that increasing taxes on the wealthy and redirecting the funds to productive investments or to lower income individuals, for example through unemployment benefits, will benefit the economy and job creation. It would also reduce inequality and address a root cause of the deficit.

FULL POST: The Bush tax cuts, and the even larger cuts in the income tax rates for high incomes over the last 30 years, have contributed to creating the federal government’s deficit (see post of 12/22/12) and to dramatically widening income and wealth inequality in the U.S., which are at their highest levels since the 1930s.

The 400 richest individuals in the US, as identified by Forbes magazine, have pocketed $1.3 trillion because of the Bush tax cuts. The best estimates are that these individuals actually pay only about 18% of their income in taxes, while their predecessors in 1960 paid more than 70%. Not only have their tax rates fallen dramatically (from 91% in 1960 and 70% in 1980 to 35% today [see 11/27/11 post for more detail]), but their increased use of offshore tax havens and other tax reduction strategies has further reduced the taxes they actually pay. For example, the tax return Mitt Romney released shows that he, and presumably his partners at Bain Capital, reported their management fees as capital gains rather than earned income. Assuming they all did, they saved an estimated $200 million on income taxes and another $20 million on the Medicare payroll tax. [1] Also since the 1960s, corporate taxes have fallen from over 27% of federal government revenue to about 10% today. [2]

These reductions in government revenue from high income individuals and corporations have dramatically shifted the tax burden from them to middle and lower income households at the federal, state, and local levels. This shift to regressive revenue sources [3] includes flat rate payroll taxes (i.e., Social Security and Medicare), and in the case of Social Security a cap so that no tax is paid on earnings over $110,000. It also includes most state and local revenue sources, such as sales and excise (e.g., cigarette, alcohol, and car) taxes; flat rate state income taxes; and state revenue from gambling (i.e., lotteries and casinos), all of which are quite regressive. [4] This shift in the tax burden has contributed to stagnant incomes for middle and lower income earners while incomes at the top have skyrocketed. [5] (See my post of 11/13/11 for more detail.) Both fairness and reversing causes of the deficit would argue for increased income tax rates on high incomes.

Despite the Republican rhetoric that high income individuals are “job creators,” the fact is that increased income for them is far less effective in stimulating job growth than increased incomes for middle and low income individuals. The US economy is driven by consumer spending; it’s 70% of our Gross Domestic Product (GDP), a measure of overall economic activity. The lower an individual’s income, the more likely he or she is to spend any additional income to buy goods and services in the local economy. On the other hand, the wealthy are more likely to save additional income or to spend or invest it outside of the US. Furthermore, they are much more likely than the less well-off to use the money for speculative rather than productive investments. Speculative investments do not help the economy or create jobs; they actually harm the economy by increasing prices for consumer goods (e.g., food and gasoline [see my post of 3/5/12]) and by contributing to speculative bubbles (e.g., Internet stocks and mortgage investments) that eventually burst and harm the economy.

Republicans have opposed an increase in the tax rate on high incomes, claiming it will hurt small businesses. But only about 2 – 3% of “small businesses” would be affected and many of these aren’t really small or aren’t businesses at all. Republicans also claim that such a tax increase would hurt the economy and job creation, but “yearly gains in employment, GDP growth, and small business job growth were all greater after the Clinton tax hikes of 1993 than after the Bush tax cuts of 2001.” [6]

In summary, there is strong evidence, from multiple perspectives, that increasing taxes on the wealthy and redirecting the funds to productive investments (such as infrastructure building) or to lower income individuals (who will spend it in their local economies), for example through unemployment benefits, will benefit the economy and job creation. [7] It would also reduce inequality and address a root cause of the deficit.

In my next posts, I’ll take a look at cutting the deficit through spending cuts, the spending cuts in the austerity package, and alternatives to them.

[1] Peters, C. Nov./Dec. issue, “The Bain of my existence,” Washington Monthly

[2] Van Gelder, S., 12/8/12, “4 ways to leap the ‘fiscal cliff’ to a better USA,” YES! Magazine

[3] Regressive revenue sources place a greater burden, relative to one’s ability to forego the income, on middle and lower income households than on higher income individuals.

[4] Jacoby, J., 12/9/12, “Biggest lottery winner? That’d be the Treasury,” The Boston Globe

[5] Appelbaum, B., & Gebeloff, R., 11/29/12, “Tax burden is lower for most Americans than in the 1980s,” The New York Times

[6] Lehigh, S., 12/14/12, “Points of clarity through the fiscal cliff fog,” The Boston Globe

[7] Judis, J.B., 12/12/12, “Rein in the rich: How higher taxes could lift the economy,” The New Republic

INCREASING REVENUE TO CUT THE DEFICIT

ABSTRACT: Increased revenue needs to be part of the effort to reduce the federal government’s budget deficit. Two revenue sources that are not included in the austerity package are closing corporate tax loopholes and enacting a financial transactions tax. They could eliminate over half the deficit with little negative impact on the economy.

The highest profile revenue issue in the austerity package is the personal income tax. Given that the 2001 – 2003 tax cuts on earned and unearned income were significant contributors to creating the deficit, reversing them for high income individuals would seem appropriate. Maintaining the Bush tax cuts on high incomes would cost up to $160 billion per year in lost revenue. Alternatively, using these funds on high impact spending will reduce the deficit over the long-term while strengthening the economy and creating jobs in the short-term.

FULL POST: Increased revenue needs to be part of the effort to reduce the federal government’s budget deficit. However, the increased or new taxes that produce the revenue should not be so large or so quickly implemented that they put the economy back into recession. Here’s a look at the revenue increases that are part of the current austerity package (aka the “fiscal cliff”), some of the negotiations that have occurred on them, and some alternatives that are not included in the package.

First, two revenue sources that are not included in the austerity package are closing corporate tax loopholes and enacting a financial transactions tax (as 10 European countries are doing). These could provide $250 billion and $350 – $500 billion annually, respectively, in new revenue, and eliminate over half the deficit with little negative impact on the economy. (See my post of 9/29/12 for more detail.) An alternative minimum tax for highly profitable corporations that would ensure that they pay a minimum tax rate – similar to the Buffet Tax proposal for high income individuals – would seem quite reasonable. Roughly a quarter of our large and profitable corporations pay NO federal income tax despite multi-billion dollar annual profits. (See my post of 11/5/11 for more detail.) Google, for example, avoided paying $2 billion in taxes in 2011 by funneling profits to overseas shell companies. [1]

The highest profile revenue issue in the austerity package is the personal income tax. The tax cuts enacted by President Bush in 2001 and 2003 are scheduled to expire. President Obama originally proposed letting the cuts expire on income over $250,000 per year, but keeping the cuts on income under that amount. The Republicans proposed a $1 million cut off and Obama has countered with a $400,000 cut off. As the cut off gets higher, the amount of revenue (and deficit reduction) is reduced. The difference between a $250,000 and a $400,000 cut off is estimated to be $40 billion per year in revenue (i.e., $160 billion versus $120 billion in increased revenue).

Expiration means the tax rate on upper incomes would increase from the current 35% to 39.6%, the rate that was in place in the late 1990s. (Note that for an individual with $20 million in taxable income, the Bush tax cuts of 2001 – 2003 have put roughly $1 million in their pockets each year for the last 10 years.) In addition, increasing the tax rate on unearned income – capital gains, dividends, and interest – back to 1990s rates is another hot topic. Given that the 2001 – 2003 tax cuts on earned and unearned income were significant contributors to creating the deficit, reversing them for high income individuals would seem appropriate.

The bottom line is that maintaining the Bush tax cuts on high incomes would cost up to $160 billion per year in lost revenue. Alternatively, using these funds on high impact spending, such as infrastructure investments or unemployment benefits, would generate an estimated net gain of 1.2 million to 1.5 million jobs and add 1.0% to 1.5% to economic growth. The growth in jobs and the economy will, in and of itself, reduce the deficit because taxes and revenue grow when the economy grows. Therefore, this approach will reduce the deficit over the long-term while strengthening the economy and creating jobs in the short-term. The only revenue increase in the austerity package that has a greater positive effect on jobs and the economy than letting the tax cuts on high incomes expire is terminating the cuts in the estate and gift taxes. [2]

In my next post, I’ll review the arguments against raising tax rates on high income individuals. In subsequent posts, I’ll take a look at cutting the deficit through spending cuts, the spending cuts in the austerity package, and alternatives to them.

[1] Brown, C., 12/13/12, “Google on ‘immoral’ tax evasion: ‘It’s capitalism’,” Common Dreams

[2] Bivens, J., & Fieldhouse, A., 9/18/12, “A fiscal obstacle course, not a cliff,” Economic Policy Institute

A MANUFACTURED AUSTERITY CRISIS, NOT A FISCAL CLIFF

ABSTRACT: The so-called fiscal cliff you’ve been hearing so much about is actually a manufactured austerity crisis. There is widespread agreement that if nothing is changed by or relatively soon after December 31 that our economy is extremely likely to fall into a recession and unemployment is likely to increase to over 9%, an increase of between 1% and 1.5%.

The austerity package bundles together a variety of measures that are largely unrelated. Addressing these complex issues individually and with time for thoughtful consideration would make more sense than doing so in a bundle under severe time constraints. The austerity package’s cuts to social programs would be 8.4% across the board, with a few programs exempted. These cuts would have very significant negative effects on low income families and on education.

FULL POST: The so-called fiscal cliff you’ve been hearing so much about is actually a manufactured austerity crisis. [1] Congress and the President agreed on this package of spending cuts and tax increases (which take effect on December 31) because the Republicans demanded it in exchange for their votes to increase the federal government’s debt cap back in August 2011. As you may remember, they pushed the government to the brink of default – which hurt its credit rating and the economy – in order to extract these austerity measures. (By the way, I believe this brinksmanship and the harm it caused is incredibly UNpatriotic; but that’s a separate discussion.) A Congressional “Super-committee” was created to find alternative ways to reduce the deficit but was unable to come to a consensus recommendation, so we are left with this “fiscal cliff.” However, the effects of the austerity package would occur over time, so it is actually more of a “slope” than a “cliff.” [2]

There is widespread agreement that if nothing is changed by or relatively soon after December 31 that our economy is extremely likely to fall into a recession and unemployment is likely to increase to over 9%, an increase of between 1% and 1.5%. The roughly $100 billion per year in spending cuts and $350 billion in annual tax increases would reduce the deficit from about $1 trillion per year to about $600 billion. But taking this $400 billion out of the country’s economic activity would almost certainly turn slow economic growth into a recession. (See my post, The “Fiscal Cliff” and the Economy of 9/19/12 for more details.) As we’ve seen in Europe, austerity measures have pushed Greece, Spain, and Britain into a recession and the whole Eurozone is teetering on the edge of recession.

The federal government’s deficit does need to be addressed, but doing so precipitously and in the wrong ways will hurt the economic recovery. The immediate problems are not the government deficit, but the lack of jobs, particularly middle class jobs, and the lack of consumer spending, which represents two-thirds of our economic activity. [3] In addressing the deficit, we should use strategies that minimize negative effects on jobs and the economy. (See my post, Addressing the Deficit on 9/29/12 for four specific policy changes that would eliminate the roughly $1 trillion per year deficit with minimal impact on jobs and the economy.) Furthermore, spending cuts and increased tax revenue should be phased in over time to reduce their impact on our weak economy. [4]

The austerity package bundles together a variety of measures that are largely unrelated other than they have some impact on the federal government’s revenue or spending; although some actually have no impact on the deficit. Therefore, some view this “fiscal cliff’ as more of a “fiscal obstacle course.” [5] Major changes to both the personal and corporate tax codes are included, as well as significant changes to spending on a wide range of government programs from defense to social programs. Addressing these complex issues individually and with time for thoughtful consideration would make more sense than doing so in a bundle under severe time constraints.

In addition to the expiration of the Bush tax cuts, which expire for all income levels in the austerity package, other benefits for middle and low income households are scheduled to expire as well. These include:

Unemployment benefit extensions beyond the traditional 26 weeks (2 million individuals would lose benefits in December and another 1 million in April)
The reduction in the Social Security and Medicare payroll tax (by 2% of pay, which puts about $1,000 a year in the average worker’s pocket)
An enhancement to the Child Care Tax Credit
The expansion of the Earned Income Tax Credit, which augments incomes of low income workers
An exemption from income tax on mortgage debt that is forgiven

The austerity package’s spending cuts come 50% from the military and 50% from social programs. Many members of Congress oppose the cuts to the military. However, there are strong arguments for cutting military spending: 1) it has more than doubled (to $733 billion per year) since 2001, 2) we are winding down the wars in Iraq and Afghanistan, 3) we have far and away the largest military budget in the world, and 4) it’s widely acknowledged that there is significant waste in the military budget. Furthermore, military spending is not an efficient way to create jobs and at 58% of the federal government’s discretionary spending, it would be difficult and unfair to significantly reduce spending without cutting the military budget. (See posts of 9/29/12 and 11/17/11 for more details.)

The austerity package’s cuts to social programs would be 8.4% across the board, with a few programs exempted, such as Medicaid and the Children’s Health Insurance Program. These cuts would have very significant negative effects on low income families and on education. It is estimated that: [6]

75,000 3 and 4 year old, disadvantaged children would lose the enriched preschool services of Head Start;
25,000 young children would lose subsidies for early care and education (aka child care);
16,000 teachers and other school staff would lose their jobs;
460,000 students would lose special education services and 12,500 special education staff would lose their jobs;
20,000 youth would lose job training;
734,000 households would lose heating (or cooling) assistance;
Community health centers would lose $55 million; and
1.3 million college students would lose tuition support.

If cuts to military spending are reduced, but overall spending reductions are maintained, cuts to social programs would be even more severe.

In my next two posts, I’ll discuss reducing the deficit through alternatives to the current austerity package, including reviewing various alternative proposals that have been put forth. I’ll focus first on options for increasing revenue and second on options for cutting spending.

[1] Klein, E., 11/28/12, “It’s not a fiscal cliff, it’s an austerity crisis,” Bloomberg

[2] Stone, C., 9/24/12, “Misguided ‘fiscal cliff’ fears pose challenges to productive budget negotiations. Failure to extend tax cuts before January will not plunge economy into immediate recession,” Center on Budget and Policy Priorities

[3] Krugman, P., 11/12/12, “On deficit hawks and hypocrites,” The New York Times

[4] Woolhouse, M., 11/19/12, “Phase in deficit cuts, economists say,” The Boston Globe

[5] Bivens, J., & Fieldhouse, A., 9/18/12, “A fiscal obstacle course, not a cliff,” Economic Policy Institute

[6] Every Child Matters Education Fund, 11/16/12, “The pending threat of Congressional actions to children’s safety net programs,” Every Child Matters, http://everychildmatters.org

THE DEBT, THE ECONOMY, AND THE POLITICAL PARTIES

ABSTRACT: Since 1945, Democratic presidents have on average reduced the federal government’s debt as a percentage of GDP by about 3% while Republican presidents have on average increased it by about 3%. PresidentObama has increased the debt percentage more than any president in this period. However, this is largely due to his inheriting a large deficit and the worst recession since the Great Depression. Other than this, the six largest increases in the debt percentage have occurred in recent Republican presidents’ terms.

Multiple measures of economic performance are better under Democratic presidents than Republican ones. Since 1949, overall economic growth measured by median annual increase in GDP has been 4.2% under Democratic presidents and 2.6% under Republican presidents. Stock market performance since 1913 as measured by the median increase in Standard and Poor’s index of 500 stocks has increased 12.1% under Democratic presidents and 5.1% under Republican presidents. The annual increase in corporate earnings since 1936 has been 10.5% under Democrats and 8.9% under Republicans.

This data certainly shows that Republicans aren’t more fiscally responsible than Democrats; if anything it strongly suggests the opposite. The data also show that Republicans aren’t the party of economic prosperity more so than Democrats.

FULL POST: The historical record of the federal debt and the performance of the economy under Republican and Democratic presidents is interesting to examine.

First, the federal government’s total debt (the total of all the previous annual deficits and surpluses) as a percentage of the overall economy (i.e., the Gross Domestic Product or GDP) is probably the most meaningful statistic about the debt. Since 1945, Democratic presidents have on average reduced the debt’s percentage of GDP by about 3% while Republican presidents have on average increased it by about 3%.

President Obama has increased the debt percentage more than any president in this period. However, this is largely, if not totally, due to his inheriting a large deficit and the worst recession since the Great Depression. Other than this, the six largest increases in the debt percentage have occurred in recent Republican presidents’ terms: George W. Bush’s two terms (with 2005 – 2009 being the worst other than Obama), George H.W. Bush’s term, Ronald Reagan’s two terms, and Gerald Ford’s partial term. The only two terms under Democratic presidents where the debt percentage increased were Harry Truman’s and Bill Clinton’s first terms. Both of them reduced the debt percentage in their second terms significantly more than the increase in their first terms, so overall they both reduced the debt percentage. [1]

Stock market performance since 1913 as measured by the median increase in Standard and Poor’s index of 500 stocks has increased 12.1% under Democratic presidents and 5.1% under Republican presidents. The annual increase in corporate earnings since 1936 has been 10.5% under Democrats and 8.9% under Republicans. [2]

While a president’s actions have only indirect influences on these measures and a president inherits policies and the state of the economy from his predecessors, this data certainly shows that Republicans aren’t more fiscally responsible than Democrats; if anything it strongly suggests the opposite. The data also show that Republicans aren’t the party of economic prosperity more so than Democrats.

[1] The Economist, 11/1/12, “The change in America’s debt by presidential term,” www.economist.com/blogs/graphicdetail/2012/11/daily-chart

[2] Healy, B., 11/2/12, “Taking stock of past races,” The Boston Globe

CANDIDATES’ BUDGET PROPOSALS AND THE DEFICIT

ABSTRACT: Both Presidential candidates, Obama and Romney, have put forward tax and budget proposals that they say will reduce the deficit. Obama’s tax and spending proposals would reduce the deficit by about one quarter. Romney’s proposals cannot be reasonably expected to reduce the deficit. Furthermore, they are likely to increase the deficit and the already high levels of inequality in income and wealth.

FULL POST: Both Presidential candidates, Obama and Romney, have put forward tax and budget proposals that they say will reduce the deficit. Obama has specified tax increases and a cut to military spending that would begin to reduce the deficit. Romney says his tax proposals would be revenue neutral, although he fails to specify how he would offset his tax cuts, and he promises to increase military spending. He asserts that his proposals would produce economic growth that would increase tax revenue and reduce the deficit; however, there is no credible evidence for that assertion. (Note: President G. W. Bush’s tax cuts, increases in military spending, and promises of economic growth that would pay for them are what began the process of turning a federal government surplus into deficits.)

Obama would let the Bush tax cuts on income over $250,000 expire and would also restore or increase taxes on unearned income (i.e., capital gains, dividends, and interest). He has also proposed limiting deductions and exclusions from income, as well as implementing the “Buffett Rule,” so that households with incomes over $1 million would at least pay taxes at the rate that middle class families do. These measures would generate roughly $200 billion per year in additional revenue, reducing the deficit by one-fifth. [1]

Obama has also proposed reducing the $700 billion military budget by about $50 billion per year as the wars in Afghanistan and Iraq wind down. Together, these tax and spending proposals would reduce the deficit by about one quarter.

Romney proposes keeping the Bush tax cuts and further reducing tax rates on earned income by one-fifth. He would maintain even lower tax rates on unearned income than earned income. Overall, these proposals would reduce income tax revenue by about $400 billion per year. Romney says he will make up for the lost revenue by reducing tax deductions and credits, and that the well-off will continue to pay at least the same amount in taxes. He says would do this by limiting total deductions and credits on a tax return to a fixed dollar amount and has mentioned amounts ranging from $17,000 to $50,000. [2]

While it is theoretically possible to achieve the same amount of revenue (i.e., revenue neutrality) under Romney’s proposals, it would be challenging and would require significantly cutting very popular deductions. [3] Four deductions account for 80% of all deductions and credits; in order of size they are the deductions for 1) home mortgage interest, 2) state and local taxes paid, 3) real estate taxes paid, and 4) charitable contributions. If an across the board cut to deductions were used to offset the loss in revenue, Romney would have to cut all these deductions by about one-third. Clearly, this would be unpopular and would also hit the middle class as well as high income families.

Romney has also proposed eliminating the estate tax, while Obama proposes maintaining an estate tax on estates over $3.5 million. Romney has also stated that he will increase the military budget. Here again, Obama’s proposal clearly reduces the deficit and these Romney proposals would clearly increase the deficit. The benefits of eliminating the estate tax, of course, go to wealthy families.

With a backdrop of 30 years of decreasing income tax rates that have seen dramatic increases in income and wealth in our best-off households and middle class families struggling to keep their heads above water, further cuts in tax rates do not seem at all likely to reverse this trend or benefit the middle class. Further, to provide some perspective on Romney’s proposal, looking at the cuts in tax rates alone, a family with taxable income of $100,000 or less, whose tax rate is cut from 25% to 20%, would see a benefit of $5,000 or less. A family with taxable income of $1 million, whose rate is cut from 35% to 28%, would see a benefit of $70,000; and if income is $10 million, a benefit of $700,000. This just doesn’t seem fair, especially on top of the huge tax cuts these high income households have seen over the last 30 years.

In addition, Romney’s proposal maintains lower rates on all unearned income (i.e., capital gains, dividends, and interest), while Obama’s has lower rates only on long-term capital gains (i.e., investments held for over one year). Having lower rates on all unearned income also doesn’t seem fair, especially given that the great bulk of unearned income goes to high income, high wealth households. Moreover, one of Romney’s arguments for lower tax rates is that by letting taxpayers keep more of what they earn, they will be rewarded for working. If we want to reward work, then income tax rates on work, namely earned income, should be lower (not higher) than the rates on non-work (unearned) income.

Finally, Romney’s assertion that cuts in tax rates will spur economic growth does not have any credible evidence. [4] This rationale has been used for the tax rate cuts that have occurred over the last 30 years. The strongest economic growth of the past 30 years (and the only elimination of the federal government’s deficit) occurred under President Clinton when he increased tax rates on high incomes. Furthermore, the rationale for tax cuts spurring growth has been that they put more money in consumers’ pockets and, with consumer spending being two-thirds of our economy, their spending will grow the economy. However, Romney has said his tax cuts will be offset by reducing deductions so that there will be no loss in government revenue or increase in the deficit. Therefore, there is no increase in the money in consumers’ pockets and no increased spending to spur economic growth.

If Romney’s tax cuts are indeed offset by reducing deductions so the result is revenue neutral, and if he lives up to his commitment to cap federal government spending at 20% of the overall economy (i.e., of gross domestic product), which would require significant spending cuts, Romney’s plans are likely to lead to job losses and a recession, not economic growth. Overall, Obama’s budget and tax proposals are highly likely to do more to spur near-term growth in jobs and the economy than Romney’s. [5]

In conclusion, Obama’s tax and budget proposals do take steps that can be reasonably expected to reduce the deficit by about one-quarter. Romney’s proposals cannot be reasonably expected to reduce the deficit. Furthermore, they are likely to increase the deficit and the already high levels of inequality in income and wealth.

[1] Tax Policy Center, Oct. 2012, “Major tax proposals by President Obama and Governor Romney”

[2] Wirzbicki, A., & Borchers, C., 10/5/12, “Questions on challenger’s idea to cap tax deductions,” The Boston Globe

[3] Kranish, M., 9/21/12, “Candidates leave much unsaid on tax plans,” The Boston Globe

[4] Rowland, C., 10/15/12, “GOP faith unshaken in supply-side tax policies,” The Boston Globe

[5] Bivens, J., & Fieldhouse, A., 9/26/12, “Who would promote job growth most in the near term?” The Century Foundation

THE FINANCIAL TRANSACTION TAX

ABSTRACT: A financial transaction tax (FTT) could generate $350 to $500 billion of revenue per year by applying a very low tax rate to financial transactions. The US had a financial transaction tax from 1914 to 1966 and 40 other countries have such a tax. It would not only generate needed revenue, it would also provide a disincentive for high volume, short-term, speculative trading. It has been dubbed “The Robin Hood Tax” (see www.robinhoodtax.org).

Multiple bills to create a FTT have been introduced in Congress, one of which, HR 6411, would rebate the tax to households with incomes under $75,000. It is also aligned with a broad, international campaign for the FTT.

FULL POST: As presented in my previous post (9/29/12), a financial transaction tax (FTT) could generate $350 to $500 billion of revenue per year by applying a very low tax rate to financial transactions. This would in effect be a sales tax on Wall St. transactions.

The US had a financial transaction tax from 1914 to 1966 and 40 other countries have such a tax. The US tax on purchases and sales of stock was 0.04% (40 cents on a $1,000 transaction). Currently, the US has a very small 0.0034% tax (3.4 cents per $1,000) that is levied on stock transactions to support the operating costs of the Securities and Exchange Commission (SEC), which regulates financial markets. However, much of the revenue is being diverted to other purposes. [1]

A financial transaction tax would not only generate needed revenue, it would also provide a disincentive for high volume, short-term, speculative trading. Such trading produces profits for speculators, but no benefit for the overall economy. It actually harms the economy by contributing to increased market volatility and increased prices for commodities such as food and gasoline (see blog post 3/5/12).

The financial transaction tax has been dubbed “The Robin Hood Tax” and is being supported by National Nurses United (www.nationalnursesunited.org) and others (see www.robinhoodtax.org). Multiple bills to create a FTT have been introduced in Congress. One is House bill HR 6411, The Inclusive Prosperity Act. It would impose a 0.5% tax on stock trades ($5 per $1,000) and a lesser rate on other financial transactions (e.g., trading of bonds, currencies, and derivatives). The tax would be rebated to households with incomes under $75,000. It would generate an estimated $350 billion per year that could be used for deficit reduction or social and human needs, as recommended in the bill. It is aligned with a broad, international campaign for the FTT, including a very active effort in the European Union. The international campaign includes a specific focus on using revenue generated to address climate change and global health issues. [2]

[1] Wikipedia, retrieved 9/28/12, “Financial transaction tax,” en.wikipedia.org/wiki/Financial_transaction_tax

[2] Vanden Heuvel, K., 9/26/12, “The better bargain: Transaction tax, not austerity,” The Nation

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

SPURRING ECONOMIC RECOVERY

Here’s issue #30 of my Policy and Politics Newsletter, written 5/15/12. The US government budget process and the elections in Europe have focused attention on how government can best spur economic recovery.

There are basically two schools of thought on how governments can spur economic recovery:

Austerity: cut spending, raise taxes, and have tight monetary policy (i.e., high interest rates)
Stimulate: increase or maintain spending, cut taxes, and have loose monetary policy (i.e., low interest rates)

The theory behind the austerity approach is that it will spur consumer and business confidence so they will increase spending and grow the economy. In addition, government spending and borrowing (i.e., deficits) take money out of the private economy. The theory behind the stimulate approach is that when consumers and the private sector are not spending enough to grow the economy, the government should step in and spend, even if it creates deficits in the short run.

In the short run, cuts in government spending eliminate jobs, either those of public sector workers or those of the workers who provide the goods or services purchased. Those goods and services may be purchased directly by governments (e.g., military equipment or construction of highways) or by the beneficiaries of government benefits (e.g., purchases by those receiving unemployment benefits or food stamps). In the US, the public sector, primarily state and local governments, are laying off about 10,000 workers a month because of reduced spending. This hurts efforts to reduce unemployment and the economic recovery.

On the other hand, government spending does create jobs; the best estimates are that the 2009 federal stimulus package created roughly 3 million jobs and kept the unemployment rate 2% lower than it would have been otherwise. (See newsletter #26, Economic Recovery: How and for Whom.)

In the US, the federal government initially took the stimulate approach, increasing spending and cutting taxes while moving interest rates to near zero to stimulate business and consumer borrowing. Now, the approach is shifting toward austerity with calls for reducing the federal deficit by cutting spending as evidenced by the budget deal last August and the budget recently passed by the House.

In the Eurozone and Great Britain, the austerity approach was adopted. The 17 Eurozone countries have slipped back into recession and Britain is tottering on the edge of recession, while the US has seen slow growth for eleven consecutive quarters. As Paul Krugman puts it, “the confidence fairy doesn’t exist – … claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the last two years.” [1]

Although everyone agrees that the US government must address its deficit, the question is when. Many economists and Federal Reserve officials believe that austerity now would hurt the US economy and that we should stimulate the economy first and tackle deficits after the economy strengthens. [2] Keep in mind that when the economy strengthens, more jobs, more production, and more sales will increase tax revenues and automatically begin to reduce the deficit.

The evidence seems pretty clear, both from current experience and the Great Depression, that in the short run austerity doesn’t work and that government spending spurs job creation and economic recovery. However, it appears that ideology is overwhelming the facts in both the US and Europe.

[1] Krugman, P., 5/7/12, “Those revolting Europeans: How dare the French and Greeks reject a failed strategy!” The New York Times

[2] Fitzgerald, J., 5/13/12, “Austerity vs. stimulus debate revived by elections inEurope,” The Boston Globe

MEDICARE AND MEDICAID AND OUR HEALTH CARE SYSTEM

Here’s issue #10 of my Policy and Politics Newsletter, written 12/9/11. The previous newsletter discussed Social Security and the fact that 1) it has no impact on the deficit, 2) the shortfall is relatively small, and 3) there are a number of straightforward ways to address the shortfall. This newsletter will begin to address Medicare and Medicaid, the other two entitlement programs that are consistently raised during deficit discussions.

Medicare and Medicaid present much greater challenges than Social Security, both because they do have a significant impact on the deficit and because the solutions are much more difficult.

Medicare is our universal health insurance program for seniors. It spent $502 billion in 2009. Medicaid is our health insurance program for low income, low wealth individuals. It spent $374 billion in 2009. Note that more than a quarter of Medicaid spending is for seniors. [1]

Medicare and Medicaid are NOT socialized health care. (Neither is the health care system under the recent reform legislation.) In a socialized health care system, the health care providers (e.g., the hospitals, doctors, and nurses) are government facilities or employees. Our Veterans’ Administration’s health care system and theUnited Kingdom’s health system are socialized health care. Both are highly regarded, although not perfect.

Medicare is a single payer system for our seniors (with some twists). Most other advanced countries’ have single payer health care systems that cover all residents (not just seniors).

Medicare and Medicaid, as parts of our overall health care system, face the same challenges of rapidly increasing costs that the overall system is experiencing. In the US, we spend over $7,500 per person per year on health care; almost two and a half times the average of other advanced countries. And yet our outcomes are worse: we have the highest infant mortality rate, many people with no health insurance or under insurance (where they pay significant costs and/or are exposed to significant risk), and a shorter life expectancy (77.9 years versus 79.4 years). [2]

Health care costs are high and growing rapidly in the US. Our system creates incentives to spend money on unnecessary tests, drugs, and procedures. Our privatized system includes marketing costs and profits. Our fragmented system has high administrative costs of 15 – 30%; twice the rate of other advanced countries. (Medicare is very efficient; its administrative costs are roughly 3%.) Our overall health system has high drug costs because there is no central entity that can negotiate with drug companies for cost control as other countries’ single payer systems do. This is why drugs are cheaper in Canada. Our Veterans’ Administration and some large health insurance companies do negotiate and get much better drug prices. (Medicare was prohibited from negotiating drug prices by the drug coverage law enacted by the Bush administration.)

Medicare, because of its size and role as the single payer for seniors, offers a means to controlling health care costs, if our politicians would let it. Medicaid, because of its size, also has significant leverage. (They can also address quality issues more effectively than our fragmented private payers.) Furthermore, Medicare’s clout could be enhanced by allowing non-seniors to join. Estimates of the potential savings of an expanded Medicare program range from $58 billion to $400 billion per year.

Medicare and Medicaid aren’t the problem. They only reflect the problems of our overall health care system. They have the potential to lead the way in solving our health care system’s problems, if our politicians will let them. Cutting back on Medicare and Medicaid will only exacerbate the problems by further complicating and fragmenting the system, while leaving many more people without affordable, decent health insurance – on top of the 50 million without insurance today.

[1] Centers for Medicare and Medicaid Services, 12/9/11, “National Health Expenditure Data,” https://ww.cms.gov/NationalHealthExpendData

[2] Reich, Robert, 7/22/11, “Why Medicare is the Solution – Not the Problem,” http://robertreich.org/post/7941066493

SOCIAL SECURITY: FACTS AND FIXES

Here’s issue #9 of my Policy and Politics Newsletter, written 12/4/11. A topic that is receiving quite a bit of attention in the deficit reduction discussions is Social Security, although it has no impact on the deficit. Sorry this is a bit long, but the complexity is tough to abbreviate further.

Social Security does have an imbalance between available resources and projected benefits over the 75 year time horizon that is typically used for analysis of it. There is a trust fund that the Social Security deductions from wages go into. It currently has a surplus, but it is projected to run out in 2037 as more people, i.e., the baby boomers, begin collecting benefits. After 2037 and until 2086, the on-going payments from workers would be able to pay about 75% of the benefits Social Security recipients are currently promised. So even in a worst case scenario, beneficiaries over the next 75 years will receive significant Social Security checks.

Social Security is the country’s most effective anti-poverty program. Poverty among seniors is roughly 10%, but without Social Security it would be 45%. Social Security lifts 13 million seniors out of poverty. [1]

Note that Social Security does not have an impact on the deficit. It is funded through the dedicated payroll tax and Social Security Trust Fund. Therefore, discussions of Social Security’s long-term solvency should be kept separate from the deficit reduction discussions.

Social Security’s imbalance can be fixed by reducing the benefits it provides or increasing the revenue for it or a combination of the two. Key options include the following: [2] [3]

Increase revenue
- Currently, Social Security tax is paid only on earnings up to $106,800. If this cap were increased, some or all of the shortfall would be eliminated. The Social Security tax was designed to cover 90% of all wages and is adjusted for wage growth. But because of the dramatic rise in very high wages, only 83% of wages are currently taxed. If the cap were increased to cover 90% of wages, it would be roughly $180,000. If this were done without increasing future benefits for those who paid more into the Trust Fund as a result, the shortfall would be eliminated.
- The current payroll tax is 12.4% with half paid by the employee and half paid by the employer. If the rate was increase by 2% to 14.4%, the shortfall would be eliminated. This would have a negative impact on low wage workers, for whom the Social Security tax is their biggest tax burden. An increase of this amount or less could be phased in over time to lessen the impact, but this would also reduce the amount of the shortfall eliminated.
- If part of the current Trust Fund balance were invested in stocks, presumably a privately managed index fund, the earnings would likely be significantly greater than the current earnings from the Treasury Bonds in which the Trust Fund is invested. This could reduce the shortfall by up to a third.
- Various other sources of revenue could cover part or all of the shortfall. Possibilities include Social Security taxes on high incomes that are above the current or future tax cap and using some or all of the estate tax for Social Security.
Reduce amounts paid to current or future beneficiaries
- Reduce the annual cost of living increase that is linked to inflation. Reducing the increase by 1% each year, would reduce the shortfall by 78%. However, well into the future, this would mean that Social Security benefits would be much less than they are today in relation to the cost of living. Furthermore, some data suggest that the current cost of living increases are less than the typical increases in expenses for seniors.
- Raise the age at which full benefits can be collected. Currently, this age is increasing from 65 to 67 by 2022. This increase could be accelerated or the age could be increased to 68 or 70, but would reduce the shortfall by less than a third. Arguments for this are that we are living longer and healthier on average and, therefore, could work longer before collecting Social Security. However, this is less true for minorities and for those in physically demanding jobs.
- Reduce the dollar amount paid to future beneficiaries. If, for example, benefits to new enrollees were cut by 5% starting immediately, the shortfall would be cut by about 30%.

Note that given that these projections go out 75 years, the assumptions that are made about economic growth and the growth of the labor force have a significant impact on the estimates of the shortfall and the impact of possible solutions. Small differences in the assumptions of annual growth have large impacts over 75 years.

In conclusion, relatively modest changes to Social Security can put it on a solid financial basis for the next 75 years. A variety of options for increasing revenue and/or reducing benefits are available, and could be carefully crafted and implemented to shield the neediest recipients from harm and provide amply advance notice of changes to participants. [4]

[1] Center on Budget and Policy Priorities, 12/4/11, “Social Security,” http;//www.cbpp.org/research under Areas of Research, Social Security.

[2] U.S. News & World Report, 5/18/10, “12 Ways to Fix Social Security,” http://money.usnews.com/money/blogs/planning-to-retire/2010/05/18.

[3] S. Sass, A. Munnell, & A. Eschtruth, 2009, “The Social Security Fix-It Book,” Center for Retirement Research,BostonCollege.

[4] Center on Budget and Policy Priorities, 12/4/11, “Policy Basics: Top Ten Facts about Social Security on the Program’s 75^th Anniversary,” http;//www.cbpp.org/research under Areas of Research, Social Security.

THE FLAT TAX AND FAIRNESS

Here’s issue #8 of my Policy and Politics Newsletter, written 12/1/11 . Having reviewed historical income tax rates in the last newsletter, this one will take a look at the flat tax, which is being proposed by a number of the Republican presidential candidates.

The flat tax – a simplified federal income tax with one tax rate for everyone – is a favorite tax reform of many of the Republican presidential candidates. It is almost always designed to be a “revenue neutral” option to the current, more complicated income tax, meaning that it would raise the same amount of revenue for the federal government as the current tax.

To produce the same amount of revenue, the flat rate has to be somewhere in the middle between the highest rate (now 35%) and the lowest rate (now 10%). Because the flat rate is lower than the current rates for high income filers, high income people would pay less. As a result, to be revenue neutral, middle and low income people will have to pay more. [1]

Some of the Republican presidential candidates have proposed variations on the flat tax to ensure that no one would pay more income tax than they do currently or to reduce the negative impact on low and middle income filers. Because these variations would reduce the total revenue to the federal government, they would not be revenue neutral and would increase the federal deficit substantially.

For example, under candidate Herman Cain’s 9-9-9 plan, the flat income tax rate of 9% is lower than all the current rates. (Note that the lowest income filers actually currently pay no income tax because of the personal exemption [$3,650 per person] and the Earned Income Tax Credit.) To make the overall plan revenue neutral, he proposes a 9% national sales tax that would apply to all purchases, including food and clothing. As a result, it is estimated that the highest income 1% of filers would pay $210,000 less in taxes and the lowest income 60% of filers would pay on average $2,000 more. [2] (Note candidate Cain has since said that his plan would include a provision to ensure that those with the very lowest incomes wouldn’t pay more.)

The flat tax is often promoted as being “fair,” because everyone pays the same rate. However, many people believe “fair” means a graduated or progressive income tax, where people with higher incomes pay a higher percentage of their income because they can afford it, as a smaller portion of their income is needed to pay for basic living expenses. In other words, higher income people have more discretionary income and therefore can afford to pay more in taxes. This is the concept behind our graduated federal income tax system and has been since the income tax was first implemented in 1913. If you believe a graduated income tax is “fair,” then the flat tax, by definition, is not “fair.” [3] And as you know from the previous newsletter, today’s income tax rates are less progressive than they used to be: today’s highest rate for the highest income filers is 35%, while in 1980 it was 72% and in 1950s and early 1960s it was 91%.

[1] Reischauer, Robert, former Director of the Congressional Budget Office as quoted in Scott Leigh, 10/28/11, “Flat-tax fantasies – and the realities,” The Boston Globe.

[2] Citizens for Tax Justice as cited in Jay Fitzgerald, Boston Globe article, 10/30/11, “Flat tax, fat cats, and you.”

[3] Leigh, Scott, 10/28/11, “Flat-tax fantasies – and the realities,” The Boston Globe.

INCOME TAX RATES: AN HISTORICAL PERSPECTIVE

Here’s issue #7 of my Policy and Politics Newsletter, written 11/27/11. As you probably know, the Congressional Super Committee failed this week to reach an agreement on a recommendation for reducing the federal deficit. One of the key sticking points was income tax rates. The Republicans insisted on reducing income tax rates along with reducing some deductions, while the Democrats refused to lower tax rates for the wealthy and supported rolling back the Bush cuts in tax rates for the wealthy.

The federal income tax went into effect in 1913. The income tax rates have always been progressive, meaning that the tax rate for lower income tax filers has always been lower than the rates for higher income filers. The rates are much less progressive today than they have been historically and they have been simplified by reducing the number of steps between the lowest rate and the highest.

A summary of federal income tax rates: [1]

Year	Lowest Rate	Highest Rate	# of Steps	Notes
2003 – 2011	10%	35%	6	Bush tax cuts
1993	15%	39.6%	5	Clintontax increase
1988	15%	28%	2	Reagan tax cuts
1981	14%	70%	16
1964	16%	77%	26
1946	20%	91%	24
1944	23%	94%	24

During most of the post World War II economic boom in theUS(1946-1964), the wealthy paid at a 91% rate while the lowest income filers paid at 20%. For the next 18 years, the wealthy paid at a 70% or higher rate while the lowest income paid at roughly 15%. Since then the rates for the wealthy have been reduced dramatically. The threshold for paying the top rate has been between $200,000 and $400,000 of income since 1964.

Note that if your taxable income is $1 million, a 1% rate reduction reduces your taxes by $10,000. If your taxable income is $50,000, a 1% rate reduction reduces your taxes by $500.

The argument typically advanced for reducing tax rates for the wealthy (or for not increasing them) is that if they have more money they will invest it and that, therefore, the economy will grow, jobs will be created, and everyone will be better off. However, in the 1990s, when President Clinton increased income tax rates on the wealthy, the economy performed very well. And in the 1980s and the 2000s, when tax rates were cut, there was no economic boom. Furthermore, over the last 30 years, as the income tax rates for the wealthy have been cut in half, income inequality in the US have widen considerably and middle and low income households have seen very little growth in their incomes (see newsletter #4, 11/13/11).

In summary, both the performance of the economy and changes in household incomes over the last 30 years do not support the argument that cutting income taxes for the wealthy will lift all boats, trickle down to middle and lower income households, or stimulate the economy.

[1] Wikipedia, 11/4/11, “Income tax in theUnited States: Tax rates in history,” retrieved from the Internet at http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

A BALANCED BUDGET AMENDMENT: DOES IT MAKE SENSE?

Here’s issue #6 of my Policy and Politics Newsletter, written 11/20/11. As you probably know, the US House voted on and rejected a Balanced Budget Amendment to the US Constitution this week.

Consideration of a Balanced Budget Amendment (BBA) to the US Constitution by both houses of Congress was required as part of the agreement that raised the debt ceiling back in August. The House and Senate will probably vote on different versions of the BBA. (See below for more detail.) A BBA, if ratified, would constitute a dramatic, some say radical, shift in policy making.

The biggest concern about a BBA is that in a recession, when government revenue falls, the BBA would require cuts in expenditures. Therefore, government likely would have to cut safety net programs, such as unemployment compensation, food stamps, heating assistance, and subsidies for health care when they are most needed. It would eliminate the ability of the government to serve as a counter weight to recessions by spending when other sectors of the economy are on a downswing. Seven Nobel Prize-winning economists have stated that a BBA would “mandate perverse actions in a recession” and would harm economic growth. Norman Ornstein of the conservative American Enterprise Institute has called a BBA “about the most irresponsible action imaginable.” [1]

An argument advanced in support of a BBA is that states have and have managed to live with requirements for balanced budgets. However, because of this, during the current recession, state and local governments have been cutting jobs nationwide by roughly 10,000 a month and have been making painful cuts in services and programs. They have been helped through this crisis by federal government support and federal deficit spending, where they get roughly a third of their revenue, and especially by the stimulus funding in 2009 that explicitly supported states. Moreover, states can borrow for capital spending outside of their balanced budgets, something the federal BBA would prohibit.

Possible provisions of a BBA include: [2]

Super majority votes in both houses of Congress are required for:
- Deficit spending (most likely a three-fifths [60%] majority)
- Tax increases (most likely a two-thirds [67%] majority)
Cap on overall spending at 18% of gross domestic product (GDP, the size of the overall economy) (Note: Under President Reagan spending averaged 22% of GDP)
Capital spending (i.e., long-term investments in infrastructure and human capital) would be included under the cap and spending controls (Note: Generally not the case at the state level)
Exemptions for national emergencies and Social Security

In summary, the BBA makes for great politics for some but is lousy policy. Please note that President Reagan promoted and popularized the BBA while the budgets he presented to Congress were the eight most out of balance budgets since WWII. And that for many of those pushing the BBA today, it was not a priority for them when George W. Bush was president and significant surpluses inherited from President Clinton became large deficits.

[1] Loth, Renee, 8/13/11, “Danger in the balanced budget amendment,” The Boston Globe

[2] Beutler, Brian, 11/14/11, “Despite packed agenda, Congress returns to radical balanced budget amendment,” http://tpmdc.talkingpointsmemo.com/2011/11/debt-limit-hangover-despite-packed-agenda-congress-returns-to-radical-balanced-budget-amendment.php

DEFENSE SPENDING: CAN WE AFFORD TO CUT IT?

Here’s issue #5 of my Policy and Politics Newsletter, written 11/17/11. Another piece of the debate on how to reduce the deficit is whether defense spending should be cut. Here’s some context.

Defense spending has more than doubled from 2001 to 2011, increasing 121%, more than any other component of the federal budget (all other discretionary items together increased 60%). It now stands at $733 billion, 58% of discretionary spending. [1] In 2011, theUS spent $51 billion on the war inIraq and $122 billion on the war inAfghanistan, together representing 24% of the defense budget.

If the Super Committee of Congress cannot present a deficit reduction compromise that is approved by Congress, defense spending will be automatically cut by about $1 trillion over 10years, a 17% reduction. For the sake of comparison, after the Korean War ended defense spending declined 31%, after Vietnam28%, and after the Cold War 31%. [2] Both of the bipartisan deficit reduction commissions, which if anything tilted to the conservative side, recommended cutting defense spending by $1 trillion over 10 years and said this could be done responsibly. Therefore, substantial cuts in defense spending should not only be possible, but are appropriate.

Some people are arguing against cuts in defense spending because of their negative effect on employment. Ironically, this argument is coming from many of the same people who have argued against federal stimulus spending, saying the government spending doesn’t create jobs. Many of them have also supported government budget cuts that reduced jobs for teachers, construction workers, police officers, and firefighters. [3] So these arguments against defense cuts ring hollow.

Furthermore, a study from the Political Economy Research Institute at the University of Massachusetts Boston by Pollin and Garrett-Peltier found that for every 12 jobs created by defense spending, the same spending for education would create 29 jobs, or in health care would create 20 jobs, or in clean energy would create 17 jobs. [4]

The USnow spends more on defense than all our top rivals in the world combined. We spend 5.4% of our overall economy, our Gross Domestic Product (GDP), on defense, while our European allies spend 1.7% of GDP on the military. They, Japan, Korea, and other countries around the world no longer need tens of billions of dollars in USmilitary support. “We can still maintain the superiority of our own security, … for two-thirds of what we now spend.” [5]

All indications would seem to be that we can safely cut our defense spending, particularly as the wars inIraqandAfghanistanwind down. Furthermore, cuts in other areas are likely to be more painful both in terms of jobs and in the reductions in the services or support people receive, such as through Social Security, Medicare, Medicaid, Head Start, education programs, etc.

Perhaps the question should be, “Can we afford NOT to cut defense spending?”

[1] Government Printing Office, retrieved from the Internet at www.gpo.gov on 11/0/11, “Table 8.9 – Budget Authority for Discretionary Programs: 1976-2015”

[2] Kayyem, Juliette. 11/7/11, “Paychecks as defense weapons,” The Boston Globe

[3] Frank, Barney, 11/12/11, “Defense cuts affect jobs, but other cuts are worse,” The Boston Globe

[4] This study is cited in both of the above articles. It can be accessed at: http://www.peri.umass.edu/fileadmin/pdf/published_study/spending_priorities_PERI.pdf

[5] Frank, Barney, 11/12/11, “Defense cuts affect jobs, but other cuts are worse,” The Boston Globe

THE FEDERAL DEFICIT: HOW DID WE GET HERE?

In the previous newsletter on corporate taxes, I mentioned that having corporations pay their fair share of taxes would help reduce the deficit. The deficit is a hot topic with the federal Super Committee required to submit its recommendations on how to reduce the deficit in 2 weeks. (This is issue #3 of my Politics and Policy Newsletter, written 11/10/11.)

The deficit does need to be addressed, especially over the long term. However, the strategies for reducing the deficit are hotly contested. The context and rational debate on the deficit often get lost in the heated rhetoric and political posturing. So here’s a first piece of perspective on the deficit.

In 2001, President Clinton turned over to new President George W. Bush a federal budget with a substantial surplus: [1]

2001 federal budget: a $127 billion surplus (asClinton left office)
Projected surplus over the next 10 years of $5.6 trillion

When President Bush left office 8 years later, he had turned this surplus into a substantial deficit:

2008 federal budget: a $455 billion deficit (as Bush left office)
Projected deficit for 2009 of $1.2 trillion and many trillions of dollars of deficits over the next 10 years

The surpluses turned into deficits due to three major reasons:

Large tax cuts that particularly benefited high income individuals and corporations
Increased military spending (including wars in Afghanistan and Iraq)
An economic recession (largely caused by a lack of regulation of the financial industry)

To reduce the deficit, therefore, it only makes sense to reverse the policies that caused it in the first place:

Reverse the Bush tax cuts. If all of them were allowed to expire at the end of 2012 as scheduled, future deficits would be cut roughly in half. [2]
Reduce military spending. Military spending more than doubled from 2001 to 2008 ($332 billion to $686 billion). All other federal spending increased less than 50% ($332 billion to $494 billion), excluding Social Security and Medicare, which have their own funding separate from general revenue. [3] (Figures are not adjusted for inflation.)
Improve the health of the economy, most importantly by increasing jobs and reducing unemployment. (More on this in a subsequent newsletter.)

I hope this is helpful context as you hear coverage of the Super Committee’s work to reach recommendations on deficit reduction. If you are so inclined, I encourage you to contact yourUSRepresentative and Senators by phone, email, or regular mail to share your thoughts on deficit reduction.

[1] Manuel, Dave, retrieved from the Internet at www.davemanuel.com on 8/14/11, “A history of surpluses and deficits in theUnited States”

[2] Tritch, Teresa, 7/23/11, “How the deficit got this big,” The New York Times

[3] Government Printing Office, retrieved from the Internet at www.gpo.gov on 11/0/11, “Table 8.9 – Budget Authority for Discretionary Programs: 1976-2015”