Kevin Drum, a political columnist for Mother Jones, writes a brief explanation why Republicans are demanding Social Security be ‘on the table’ for spending cuts.   Essentially, Drum explains, Social Security payroll taxes, which are paid primarily by labor and the middle class, went into surplus under Clinton and that allowed for lower income taxes on the wealthy.  Going forward income taxes will need to be raised to continue making Social Security solvent because Social Security surpluses were drained by the Bush Tax cuts.  So the wealthy now want to renege on replenishing the Social Security trust funds.

Charles Krauthammer is upset that Dick Durbin says Social Security is off the table in the fiscal cliff negotiations because it doesn’t add to the deficit:

This is absurd. In 2012, Social Security adds $165 billion to the deficit. Democrats pretend that Social Security is covered through 2033 by its trust fund. Except that the trust fund is a fiction, a mere “bookkeeping” device, as the Office of Management and Budget itself has written. The trust fund’s IOUs “do not consist of real economic assets that can be drawn down in the future to fund benefits.” Future benefits “will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.”

What Krauthammer means is that as Social Security draws down its trust fund, it sells bonds back to the Treasury. The money it gets for those bonds comes from the general fund, which means that it does indeed have an effect on the deficit.

That much is true. But the idea that the trust fund is a “fiction” is absolutely wrong. And since this zombie notion is bound to come up repeatedly over the next few weeks, it’s worth explaining why it’s wrong. So here it is.

Starting in 1983, the payroll tax was deliberately set higher than it needed to be to cover payments to retirees. For the next 30 years, this extra money was sent to the Treasury, and this windfall allowed income tax rates to be lower than they otherwise would have been. During this period, people who paid payroll taxes suffered from this arrangement, while people who paid income taxes benefited.

Now things have turned around. As the baby boomers have started to retire, payroll taxes are less than they need to be to cover payments to retirees. To make up this shortfall, the Treasury is paying back the money it got over the past 30 years, and this means that income taxes need to be higher than they otherwise would be. For the next few decades, people who pay payroll taxes will benefit from this arrangement, while people who pay income taxes will suffer.

If payroll taxpayers and income taxpayers were the same people, none of this would matter. The trust fund really would be a fiction. But they aren’t. Payroll taxpayers tend to be the poor and the middle class. Income taxpayers tend to be the upper middle class and the rich. Long story short, for the past 30 years, the poor and the middle class overpaid and the rich benefited. For the next 30 years or so, the rich will overpay and the poor and the middle class will benefit.

The trust fund is the physical embodiment of that deal. It’s no surprise that the rich, who didn’t object to this arrangement when it was first made, are now having second thoughts. But make no mistake. When wealthy pundits like Krauthammer claim that the trust fund is a fiction, they’re trying to renege on a deal halfway through because they don’t want to pay back the loans they got.

As it happens, I think this was a dumb deal. But that doesn’t matter. It’s the deal we made, and the poor and the middle class kept up their end of it for 30 years. Now it’s time for the rich to keep up their end of the deal. Unless you think that promises are just so much wastepaper, this is the farthest thing imaginable from fiction. It’s as real as taxes.

Beezer here.  Starting in 1983 payroll taxes were deliberately set higher than they needed to be.  Just another legacy from the Reagan era when the philosophy of gaming the tax system became a legitimate practice.  Hat tip to economist’s view for spotlighting Drum’s piece.

The idea that we cannot solve our problems is absurd.  Not only can we solve them, but we could at the same time afford putting millions to work on huge infrastructure projects we are going to do anyway.

How can that be?  Today’s interest rate on a five year Treasury is .62%, about 1.4% below inflation.  We could issue $500 billion in five year Treasuries at negative interest rates to fund a five year $500 billion national infrastructure program.  Such a project would cut the current unemployment rate in half!  President Obama’s 2013 tax proposals would raise, net, about $1.7 trillion in additional revenue over 10 years.  Do the math.  We could easily pay off those 5 year bonds, interest and principal, in five years if Obama’s revenue raising were passed into law.

If we simply restored President Clinton era tax rates (you know, the rates that resulted in surpluses) we would generate more than $4.1 trillion in additional revenue the next 10 years!

It’s simply amazing to this author that we aren’t already doing this.  If we don’t get our act together future generations will consider this the ‘dumbest generation,’ of all time.

New York Times columnist Frank Bruni has a piece in the New York Times describing our political penchant for last minute brinkmanship.

“Taxmageddon,” as it’s sometimes called on Capitol Hill, is the new biggie, looming early next year. That’s when, in the absence of Congressional action, supposedly temporary tax cuts passed under George W. Bush and extended by President Obama expire as automatic spending reductions agreed to at the end of the debt ceiling showdown (“debtmaggedon”) begin to kick in. The combined force of those developments, according to some projections, would be a $700 billion blow to the economy in 2013 and, as the year progressed, a recession….

Not to point out the obvious, but the $700 billion doesn’t disappear if these ‘temporary’ tax cuts are not extended and the budget cuts implemented.  Rather, some of the increased revenue goes to the government (estimates from the Tax Foundation run from a low of $100 billion to a high of $250 billion increase annually), and the spending cuts end up reducing deficits and debt. The problem there is what that transferred $700 billion is spent on.  Do we pay down deficits and/or debt?  Do we begin massive hiring on infrastructure projects?  Do we split the difference between these two very different uses?

If Congress does extend the tax cuts, where does that $700 billion go in the private sector?  The presumption is, depending upon your income, some of it goes to consumption, some of it goes to whittle down debt, and the remainder basically goes into some form of savings.  But these are assumptions.  The fact is no one can predict where that $700 billion in ‘temporary’ tax cuts really goes and in what proportion.

The two government options, paying down deficits and or debt, or hiring millions of people doing infrastructure projects, are predictable.  Applying the $700 billion against public debt is easy enough to figure out.  It’s simple math, only complicated by the interest rates applied to the debt that’s retired.   The downside to this option is that the benefits of lowering debt, accrue over time in the form of less interest that needs paying.  If the $700 billion retires $700 billion in debt that carries a 4% interest rate, then the annual savings is $28 billion.  If it’s applied directly to deficits, then the benefit accrues more quickly in the form of dramatically reducing the deficit.

The second option, infrastructure projects, is even more straightforward.  Estimates on these projects range from 10,000 jobs per billion to as much as 18,000 jobs per billion.   Research by the University of Massachusetts Public Economy Research Institute estimates $148 billion in infrastructure work would create as many as 2.6 million jobs.   That would drop the unemployment rate down to 5.6%.

These jobs don’t appear instantly, of course, but they do have legs.  These types of projects can run for three or more years.   And the net economic benefits can last for decades.

Beezer here.  The upside is greater than the downside, in our opinion.  Predictions of a double dip can’t be ignored, but any recession is guaranteed to be fairly brief simply because of the employment that would be created.   Splitting the difference two ways with some of the tax cuts extended but not all, and the resulting  revenue increase dedicated to infrastructure and its employment, would be the most effective course.  Our dysfunctional Congress, particularly the Tea Party members in the House, are determined to defund almost all  government spending and that means no tax increases.  Period.   They have single mindedly pushed the nation to the so-called ‘fiscal cliff’ at every opportunity.  Democrats should say the nation is going to build a bridge over the fiscal cliff. 

Sometimes a commentator writes the most precise explanations for our problems.  Such was the case recently in a comment to an article written by Dean Baker at the blogsite for the Center for Economic and Policy Research about how market’s naturally shift income upward, not downward.  The commentator is simply signed on as ‘bmz.’

written by bmz, January 05, 2012  9:29 AM

Just about every Republican politician alleges that: “we do not have a taxing problem, we have a spending problem;” but this is a lie. Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Prior to 1981, income taxes averaged 12%(+/-1%) of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses(which excludes Medicare and Social Security) have remained 12%(+/-1%) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund.  When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the 1% to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing the 99%’s money. The national debt has been caused primarily by income taxes which were reduced far below their historic 12%(+/-1%), not by on budget expenses, which have remained at their historic 12%(+/-1%) throughout. These taxing games have transferred $ trillions from the 99%’s payroll taxes to subsidize the wealthy’s income taxes.

Make no mistake, the Bush tax cuts, and the series of tax cuts piled on since the economy plunged into deep recession beginning in 2007, are the primary cause of deficits and a major contributor to projected long term debt.

From an article by Bruce Bartlett, top economic advisor to former President Ronald Reagan among other leading conservative Republicans at the time.

But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year.

By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average.

Much is made of spending projections for Medicare, Medicaid and Social Security but it’s seldom mentioned that even those rising costs could be covered if Congress rolled back it’s tax cutting frenzy of the past 12 years.

Tax collections could keep pace with those costs if Congress permitted the George W. Bush tax cuts to expire on schedule in 2012 and allowed the alternative minimum tax to hit millions of additional households, the CBO said. But under current tax policies, the CBO said, tax collections would barely cover the cost of the health and retirement programs alone by 2035.

Economics professor Robert Reich, former Secretary of Labor under President Bill Clinton, nails down how the solve our long term budget debt.

 

Stop the Austerity Train Wreck! 

The biggest question right now on Planet Washington is whether the congressional supercommittee will reach an agreement.

That’s the wrong question. Agreement or not, Washington is  on the road to making budget cuts that will slow the economy, increase unemployment, and impose additional hardship on millions of Americans.  

The real question is how to stop this austerity train wreck, and substitute the following: 

FIRST: no cuts before jobs are back – until unemployment is down to 5 percent. Until then, the economy needs a boost, not a cut. Consumers – whose spending is 70 percent of the economy – don’t have the money to boost the economy on their own. Their pay is dropping and they’re losing jobs.  

SECOND: Make the boost big enough. 14 million Americans are out of work, and 10 million are working part time who need full-time jobs. The President’s proposed jobs program is a start but it’s tiny relative to what needs to be done. It would create fewer than 2 million jobs. We need a big jobs program – rebuilding America’s crumbling infrastructure, and including a WPA and Civilian Conservation Corps.

THIRD: To pay for this, raise taxes on the super-rich. It’s only fair. Never before has so much income and wealth been concentrated at the very top, and taxes on the top so low. Go back to the 70 percent marginal tax we had before 1980. And include more tax brackets at the top. It doesn’t make sense that any income over $375,000 is taxed at the same 35 percent, even if it’s a billion dollars. And tax all sources of income at the same rate, including capital gains.  

FOURTH: Cut the budget where the real bloat is. Military spending and corporate welfare. End weapons systems that don’t work and stop wars we shouldn’t be fighting to begin with, and we save over $300 billion a year. Cut corporate welfare – subsidies and special tax breaks going to big agribusiness, big oil, big pharma, and big insurance – and we save another $100 billion.

Do you hear me, Washington? Do these four things and restore jobs and prosperity. Fail to do these, and you’ll make things much, much worse.

Beezer here.  The problem is that the GOP is totally owned by those in the top 1% of the income pyramid.  The nation’s wealthiest families use the GOP as a tool to protect their corporate subsidies and the tax breaks available only to the wealthy.  So far their influence in Congress has managed to control the national discussion of what to do, concentrating this discussion mainly on cutting federal programs that benefits the non-wealthy such as Medicare, Social Security and Medicaid instead of rolling back a dozen years of piling tax cut upon tax cut that have almost entirely further enriched the already wealthy.  The GOP promotes austerity programs for everyone but their 1% benefactors, even as poll after poll shows that the majority of citizens understand tax cuts are a huge part of the problem.  The GOP ignores these polls because they don’t represent the majority of Americans.  They represent a very small slice of America, the 1% who own them and to whom they owe their allegiance.  We don’t think this allegiance will survive the 2012 elections because the austerity is already being felt by the majority at the municipal level.  Services are being drastically cut at this level, not to mention the GOP proposals to extend cuts even further.   Congressional approval levels are in the single digits, below those for British Petroleum during the Gulf Oil spill disaster.   Obama’s levels are below 50%, but even at those levels the President’s approval rating is four times that for Congress.   Occupy Wall Street protests bring nothing but derision from GOP politicians, who portray the participants as nothing but unemployed malcontents who want to destroy Capitalism.  They are wrong.  Many of the participants are employed.  And many of those who are not employed are college graduates who face huge tuition debts they cannot pay back without jobs.  These young adults have parents.  The GOP response for them to ‘suck it up’ while the wealthiest 1% rake in all the income is not going to fly politically, in our opinion.  Obama appears finally to understand the overall situation and is relentlessly pressing for passage of a jobs act in the face of GOP opposition.  He should not only continue but he should up the ante by increasing the size of the jobs act.    Hiring directly to rebuild America’s crumbling infrastructure is the single policy that will begin economic recovery.  When the GOP controlled Congress balks, he should  portray Congress as a ‘do nothing’ Congress as did Truman after WWII.   Let the tax cuts expire, the money is being hoarded.  It isn’t being invested and not enough is being spent on consumption because GOP tax cut politics have starved the 99% so much they can no longer consume enough to support Main Street businesses.  Reich is correct.  If the GOP is not stopped, the nation is in for a real train wreck.  

In an incredibly candid video interview with the Wall Street Journal, economics guru Nouriel Roubini explains what’s wrong with Western capitalist economies:  They’re well into the process of transferring labor income to capital, a process that if not contained will create a Depression that threatens not only capitalism, but democracy too.  You can watch the 22 minute interview, or you can go to an article summarizing Roubini’s views here at the Common Dreams blogsite.

First you have to understand that Roubini gained prominence by predicting the housing collapse and the subsequent great recession.  His nickname is ‘Dr. Doom.’  He said he’s now again telling clients to raise cash and take a ‘better safe than sorry’ investment approach.  Roubini sees austerity regimes that ‘front load’ government spending cuts might create a double dip recession that will further crush labor income and make deficits and debt rise rather than fall.  From the Common Dreams article:

Marx, among other theories, argued that capitalism had an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.

Companies, Roubini said, are motivated to minimize costs, to save and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies.

Now, in current financial crisis, consumers, in addition to having less money to spend due to the above, are also motivated to minimize costs, to save and stockpile cash, magnifying the effect of less money flowing back to companies.

“Karl Marx had it right,” Roubini said in an interview with wsj.com. “At some point capitalism can self-destroy itself. That’s because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What’s individually rational…is a self-destructive process.”

Roubini added absent organic, strong GDP growth — which can increase wages and consumer spending — what’s needed is large fiscal stimulus, agreeing with another high-profile economist, Nobel Prize-winner Paul Krugman, that, in the case of the United States, the $786 billion fiscal stimulus approved by Congress in 2009 was too small to create the aggregate demand necessary to advance the U.S. economic recovery to a self-sustaining expansion.

Absent additional fiscal stimulus, or unexpected strong GDP growth, the only solution is a universal debt restructuring for banks, homes (essentially households/families), and governments, Roubini said. However, no such universal restructuring has occurred, Roubini said.

Without that additional fiscal stimulus, that lack of restructuring has led to “zombie houses, zombie banks, and zombie governments,” he said.

No Good Choices Outside of Fiscal Stimulus or Debt Restructuring

The United States, Roubini said, can in theory: a) grow itself out of the current problem (but the economy is currently growing too slowly, hence the need for more fiscal stimulus); or b) save itself out of the problem (but if too many companies and citizens save, the flaw Marx identified is magnified); or c) inflate itself out of the problem (but that has extensive collateral damage, he said).

However, Roubini said he did not think the U.S. or the world are now at the point where capitalism in self destructing.

“We’re not there yet,” Roubini said, but he did add that the current trend, if it continues, “runs the risk of repeating the second leg of the Great Depression” — the ‘mistake of 1937.’

In 1937, President Franklin D. Roosevelt, despite the fact that the first four years of massive New Deal fiscal stimulus had lowered U.S. unemployment from a staggering 20.6 percent during the Hoover Administration at the start ff the Great Depression, to 9.1 percent, felt pressure from Congressional Republicans, and he — as current President Barack Obama did with the Tea Party-led House GOP in 2011 — gave-in to conservatives and cut government spending in 1937. The result? U.S. unemployment started rising again, and hit 12.5% in 1938.

Cutting government spending prematurely hurt the U.S. economy in 1937 by reducing demand, and Roubini sees the same pattern playing out today, following austerity measures contained in the debt ceiling deal.

Beezer here.  The underlying problem is we’ve forgotten what our grandfathers and great grandfathers learned during the Great Depression.  In these circumstances you simply have to hire people.  It doesn’t matter how or who does this, it simply needs to be done.  Our view is that the government needs to raise marginal tax rates (Roubini says countries cannot get out from under debt without doing this) and use that money to hire people to improve infrastructures.  This has three positive effects: a) people will make more money and boost aggregate demand; b) raising marginal tax rates dislodges money that’s essentially being hoarded and frees it up to hire people without increasing deficits and debt; c) improving infrastructure makes US companies more competitive.  By the way Roubini clearly lays responsibility for our problems on President George W. Bush policies.  He points out the Bush tax cuts were ill advised because they increased debt when the country was at war and passing new drug benefits for seniors.  In addition, lax regulatory regimes allowed financial agents, most notably hedge funds and banks, to overleverage and become insolvent once housing prices rolled over, Roubini said.