Saturday, June 02, 2012

It's the policy of tax cuts, deregulation and shrinking government that's failing

With the release Friday of May's terrible jobs report (and let's not sugar coat anything-- 69,000 created is terrible, and the unemployment rate notched up a tenth as a result) Mitt Romney and other Republicans have been quick to say that it is proof that President Obama's policies are not working. Their solution is to (predictably) suggest cutting taxes on 'jobcreators' (meaning the very wealthy and corporations,) getting rid of regulations and slashing government spending.

Not so fast. Certainly the policies in place are failing to stimulate the economy, but let's take a look at the policies in place.

Let's begin with taxes. Federal taxes are now at their lowest rates since 1950. It's hard to remember that during the 1950's and 1960's, the top marginal rate got as high as 91% in the Internal Revenue Code of 1954. And there were far fewer loopholes than there are today, so 91% meant 91%. Contrary to what today's conservatives will tell you, this did not deter job creation at all, as the American economy boomed (for example, Ray Kroc bought a hamburger stand from the McDonald Brothers in 1955, fully aware that if he was successful in his plans to turn it into a national chain of fast food restaurants he would be taxed at 91%. He and others prospered anyway.) Conservatives love to claim that the Reagan tax cuts were responsible for an economic recovery in the 1980's. But the top marginal rate under Reagan was cut in 1981 to 50%. That was what was considered 'conservative' in those days. What we have now is a system of historically low tax rates (on everybody) and then we have enough loopholes so that last year more than twenty thousand billionaires and multi-millionaires paid no tax at all as did many of the most profitable corporations. In other words, we have created a tax system in which tax rates are historically low, and what tax is paid, is paid mainly by the middle class, not the very wealthy. So the GOP argument that cutting taxes on the very wealthy will spur jobs is FALSE. Both the official and actual tax rates on the very wealthy and corporations are ALREADY the lowest they've been in decades and they have not stimulated the economy. Cutting them further will not help any more than the past several years of very low taxes have helped. In fact, if I fault Obama here, it's that he bought into the tax cut argument. Recall that the Stimulus was 43% tax cuts (including a mixture of corporate and individual tax cuts) and that he has further cut payroll taxes, and agreed to an extension of the Bush tax cuts two years ago. Let's be clear. Cutting taxes on so-called 'job creators' has NOT created jobs (certainly not in America.) Mostly, they've stashed the cash in accounts someplace (it is no coincidence that offshore banking in places like Switzerland and the Cayman Islands has exploded since the Bush tax cuts were passed.)

What about regulation? It's certainly true that there are regulations out there that can stifle small businesses. Former Democratic presidential candidate George McGovern, after leaving the Senate, opened a Bed and Breakfast in South Dakota. He later said that he got overwhelmed by all the paperwork he had to deal with, and recognized most of it as stuff he had written, sponsored or voted for while in the Senate. As he notoriously told one interviewer, "If I realized what a pain in the neck it would be, I wouldn't have written half of that stuff." However, in getting rid of regulations or deciding not to write new ones, we want to be careful as well. Let's remember that it was the (bipartisan) vote in 1999 that repealed the Glass-Steagull act and opened the door to exactly the kind of wild speculation by the big banks in risky derivatives that led to the crash of 2008. Taxpayers are understandably irate at having to bail out these big banks after their own irresponsible behavior, especially since as long as the banks were making big money, it went to their own executives and investors, not to the taxpayers (historically low tax rates, remember?) Dodd-Frank is a start in the direction of regulating the banks, but even at that it was watered down by their lobbyists, ensuring that what happened in the early 2000's could potentially happen again. A part of the act which was removed in order to gain the vote of Senator Scott Brown (R-MA) and break a GOP filibuster, the so-called Volcker rule would prohibit banks from investing in hedge funds and private equity funds. This is exactly the kind of investing that got them into trouble in the first place. The CEO of J.P. Morgan Chase, Jamie Dimon, has argued against the Volcker rule and said that the rule could cost his bank $400 million, but then has said little since trading in a hedge fund cost his bank $2 billion, five times the amount he claims the Volcker rule would cost.

Certainly if a chain of interconnected large banks fail, it can destroy the economy for everyone. BUT EVEN WITH Dodd-Frank, and EVEN IF the Volcker rule is in effect, there would still be FAR LESS regulatory oversight than there was under Glass-Steagull. During the time that Glass-Steagull was in effect, between 1937 and 1999, recessions were far milder than they have been since then (even the 2001-2002 recession was much deeper than any other recent recessions before the current downturn.) So once again, conservatives have gotten their way with regulation of the banks. Suggesting more deregulation would be going in exactly the wrong direction.

What about other companies than banks? Certainly if most business fail whether because of lack of regulatory oversight or for some other reason they won't ruin the entire economy. No, but they can ruin a lot for a lot of people. For example, given the BP oil spill, does anyone suggest that we should relax regulations on offshore oil drilling (I'm not saying don't drill, but would 'deregulation' make sense here?) Regulations are generally written either to protect the safety of workers, to protect the environment or to protect the consumer. Which of these three should we protect less? Haven't we seen enough people die in mine disasters in the past few years? Don't we already have enough pollution? Do we want more unsafe products on the market?

Are there some regulations that could go because they are obsolete, unnecessary or needlessly burdensome? Of course. And we should remove unneeded regulation, but we should be sure it is unneeded first. If we don't the price will be paid in lives-- maybe even ours (Vioxx anyone?)

And what about government spending? Isn't the deficit dangerous to the economy? Shouldn't we learn from Europe? To a degree, yes. We do presently have a national debt that exceeds $15 trillion and our debt-to-GDP ratio is very high (though not a record; it was significantly higher in 1946.) However, it must first be noted that a deficit is caused when spending exceeds revenue (just like if you spend more than you make, you will end with a debt, that you will have to borrow to pay.) Republicans love to claim that we have spent our way into a record deficit. Doing so, however, ignores the effect of trillions of dollars less in tax collections (remember those historically low tax rates? That represents revenue not going to the government.) The truth is, that spending under the Obama administration has on average increased at 0.4% per year, the slowest since the Eisenhower administration. I even give the GOP Congress some credit for this, with their (at times unreasonable) insistence on spending cuts as the price for doing anything the past two years (not that we won't pay for it of course, but the price will be less accurate hurricane forecasts and tornado warnings a decade or more from now.) The reason why the deficit has grown so much over the past decade is because tax revenues coming into the government have dropped through the floor (historically low tax rates, remember?)

Well, what about cutting government spending as a means to stimulate the economy then? Unfortunately, as I explained last year, cutting spending in the middle of a recession has exactly the opposite effect. In fact, this is exactly what we SHOULD be learning from Europe. Greece, Spain, Portugal and Ireland have all implemented various types of austerity to combat the recession, which involves massive cuts in their public sector workforces. The European Central Bank and the IMF have helped bail them out, but on the condition they cut their govenrment spending so that they could pay back the loans. Only an unexpected (but entirely foreseeable) development happened-- the economies of the countries collapsed so fast that even with the cuts they are having trouble making the payments because with a collapsing economy less is being produced at all and so less can be collected in taxes no matter how high the rate is. For example, the Greek economy has shrunk by over 20% just this year. What about the U.S. economy? With May's report, it is a fact that over 600,000 public sector jobs have been lost during the Obama administration. This includes over 11,000 federal jobs and much larger cuts at the state and local levels. This is precisely the OPPOSITE of what would be called for in classical Keynesian economic theory. One can argue whether this is itself caused by the bad economy (since states have to operate on a balanced budget) or by a conscious GOP attempt to shrink government (the truth is probably some of both, and there are enough public sector job losses to be explained using both of these causes.) However, contrary to what conservatives will tell you, if the economy has not been stimulated, it is not because of government hiring, but rather the dumping of hundreds of thousands of teachers, police and other public sector workers into the job market. So what we see is the effect of government not hiring, but in fact doing the opposite and sandbagging any private sector driven improvement in the economy by adding to the number of unemployed people (with lower income and consumer spending to match.)

So is the economy not doing very well? Absolutely, the May jobs report makes it clear that it is not. And certainly the interconnectedness of global markets means that we are fools if we believe that problems in Europe or Asia won't eventually be reflected in the U.S. But don't let conservatives suggest that they can 'cure' it by cutting taxes, deregulation and cutting government spending. Because that's what we've been doing for YEARS, and where we are now is where it has taken us! MORE tax cuts, deregulation and cuts to government spending would be like trying to cure high cholesterol by eating cheeseburgers.

1 comment:

Anonymous said...

Well done, sir. Very well written and sourced. Thank you