This post is an attempt to take a ‘look back’ and summarize the basic economic debate we’re having today in American and in Europe too, for that matter.

One side is alarmed at the size of governments deficits and, as a result, also alarmed at the growing debt that is being accumulated.    Their preferred corrective is to cut government spending and thus deficits and debt.  If that is not done as soon as possible, then nations with high deficits and debt are in danger of experiencing high interest rates and high inflation rates.  Under that scenario nations might not be able to shoulder their financial obligations and could renege on their obligations with catastrophic results.  This side also argues that without some short term pain, in the long run the pain will be far more severe.   That’s pretty much the basic argument being made by this side.

The other side  argues that a great and severe recession is the cause of the current deficits, and the long term threat of debt is being created primarily by  out of control increases in health care spending, both in the public and the private sector.  That side prefers to attack both problems by spurring economic growth and incomes, which ends the recession and thus decreases or eliminates the current deficits, while at the same time, reforming health care systems in an effort to attack the long term debt issue that is being created by out of control health care spending increases.  That’s pretty much the other side.

So the common ground is that deficits and debt must be decreased.  The dispute is over how best to accomplish this common goal.

So far a major stumbling block is that one side wants to concentrate primarily on government spending cuts and is reluctant to increase taxes and revenue.  The other side wants to rely on both tax increases and spending cuts.  At this particular moment the spending cuts only side has accepted modest tax increases and now wants to do more government spending cuts.   The revenue increasing side claims it has already accepted large cuts.  Neither side is happy with the size of each other’s concessions.

With this concentration on cuts and revenue, the basic idea of improving the economy (a goal both sides say they want) is sort of an orphan and neither side has made much in the way of concession to the other.   The cut side has maintained throughout that tax cuts are the best way to improve economic performance.  The revenue side points out that tax cuts haven’t historically correlated to having this effect, and anyway, tax cuts increase deficits without offsetting spending cuts.

In terms of this argument, neither side has had enough of a political victory to implement their preferred policies.   The revenue side has managed to get some increased, short term spending, but that’s it.  The cut side has managed to get some spending reductions (about $2.4 trillion over 10 years) but not the size in spending cuts it wants.  The end result economically is a muddle and, so far, while there’s been some improvement in economic performance  it is considered weak and vulnerable to any further economic headwinds.

This is pretty much a summary of the debate in the US.   The question is which side’s preferred methods might work best if they could be applied forcefully:  Big cuts, or Big job increases?  Some clues are coming out of Europe, which faces similar concerns over deficits and debt.  There are important differences between European economies, governments, and policies compared to those in the US.  One cannot ignore these differences in any honest analysis.   But the concerns are the same.  What are the differences?  One, Europe is many countries that share one currency.  Unlike the US there is no European central bank which can easily enforce and coordinate currency and monetary policies; Two, each country has its own sovereign government and its own unique political structure, which also impedes coordinated fiscal policies too.

In Europe the cuts people won the day politically early on.  They demanded so-called ‘austerity’ level spending cuts on some members whose economies were suffering the most, even if their fiscal policies were relatively conservative (lower debt levels, no deficits) when the recession showed up.  This hasn’t worked very well, as a practical matter.  Those countries who’s economies seemed healthy before the recession (Ireland, Spain, Italy being the foremost examples)  have seen their economies worsen substantially, showing unemployment rates not seen since the Great Depression.   Even Great Britain, which is essentially a European economic engine but has its own currency, has suffered from austerity policy application and now hovers on a ‘double dip’ recession.   As a result, the EU governing bodies have lightened up on monetary policies and, as was done in the US, is providing backstop guarantees, and liquidity facilities,  to the most troubled EU countries.  That’s helped, particularly in regards to the interest rates being charged the most troubled countries.  Unemployment, however, remains very stubborn.

And that’s pretty much where everything stands.  Neither side has marshaled enough political power to translate their viewpoints into strong policies.  In the US, for example, infrastructure or other direct hiring such as direct money transfers to cash strapped states (something the EU cannot do) are not being done, and that’s a key component of the revenue side’s policies.   For the cost cutters, major benefit and spending cuts in social safety net spending like Social Security, Medicare and Medicaid are extremely unpopular.  Outside of Obamacare, which implements $716 billion in cost savings and implements a 3.8% tax hike to help match revenues with bills, nothing has been accomplished in an area both sides agree is otherwise going to be a major driver in national debt (private and public).

Beezer here.  So it goes, back and forth and extremely divisive at the political level.  That said, public opinion has been and continues to be in favor of job creation over almost anything else.  That would seem to politically favor the revenue side whose policies heavily favor government spending on creating jobs via infrastructure spending, or in direct money transfers to states.

I don’t know who ‘bmz’ is other than that he or she really knows what they are talking about when it comes to the federal budget.  Particularly that part of the federal budget dealing with entitlement spending.  Which is why I’m posting this comment by bmz in a post on the Center for Economic and Policy Research blogsite.

No true Democrat could support cutting Social Security and Medicare.
The Social Security trust fund, together with payroll taxes, is sufficient to cover program benefits for more than the next 20 years. Moreover, assuming no additional funding, currently scheduled payroll taxes can provide benefits equal to those now provided, even adjusted for inflation, for the indefinite future. Given all the real economic problems we truly must address now, there is no legitimate argument for even considering Social Security modifications until the economy is fully back on its feet and long-term costs and revenues can be more accurately projected.

The Medicare trust fund was actually “going broke” when Pres. Obama took office, due in large to changes pushed through by the Bush administration. At that time, the trust fund was projected to be exhausted by 2016. However, the ACA (“Obamacare”), rather than taking the much vaunted $716 billion out of Medicare, actually added that amount to the Medicare trust fund; which is now projected to last until 2024. In one fell swoop, two thirds of the Medicare shortfall was eliminated. Eliminating the remaining one third could be even easier; for example, now that the ACA will protect older working Americans, we can in good conscience synchronize Medicare eligibility dates with those for Social Security. The relative ease of these Medicare fixes, and the fact that the small Social Security issues remaining are far beyond our legitimate planning horizon, why then all the hysteria about entitlements eating our children and grandchildren? In a word—TAXES.

Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he extensively 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. Between 1946 and 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 exclude 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 and Medicare trust funds.  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 before the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise any 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. Although the Republicans like to talk about those “47%” who in large part pay only payroll taxes as being supported and subsidized by those who pay income taxes, the truth is the opposite; ever since Reagan, income taxes have been subsidized by payroll taxes; and the failure to raise income taxes to pay back that subsidy, is to steal the money that middle-class workers have had taken out of their income to pay for their retirement.

Hence, the only problem we have with entitlements is paying back the money that we borrowed from the Social Security and Medicare trust funds. This requires that we raise income taxes in the short term to 12% to cover normal on budget expenses. And, as soon as the economy recovers, we must raise taxes above 12% to pay back the trust funds. This is why the Republicans refuse to discuss raising income taxes; they would much prefer to steal workers retirement funds, and reduce the entitlements paid for by them. We do not have an entitlement problem, we have a Republican problem.

Tomorrow’s vote is first about an immediate threat to our democracy.  This threat comes primarily from the domination of large, mostly multi-national, corporations who wish to lock in their dominance by using government to limit competition.  The US Supreme Court’s Citizens United decision accelerated this effort because it unleashed a flood of corporate cash, much of it provided in secret, into our political campaign system.

This multi-billion dollar effort is causing another, longer term problem:  We as a nation are not addressing our real needs and this means we are innocently taking massive and unnecessary risks.   What are those risks?

•  We are running larger deficits and debt than is necessary.  Yet we are being pandered to, again, with more tax cuts that are guaranteed to further increase deficits and debt.
•  We are much too dependent on fossil fuel energy.  Billions of people are climbing out of poverty worldwide and demanding a larger share of fossil fuel energy, which guarantees the price of these fuels will climb.  Yet we have no national program to install sustainable, clean energy systems which would insulate our country from the increasing cost of fossil fuels.   Importantly, this dependence threatens our national security as we are in danger of being in continual wars overseas protecting our fossil fuel sources.
• We are over using chemicals and hormones in our food industry.  This is not only degrading our environment but is also creating an epidemic of ill health outcomes, like diabetes, that are taxing our health care system and costing us hundreds of billions of dollars in unnecessary spending annually.
• Our weather is very likely to become increasingly more severe due to global warming.  Yet we have not begun national programs, such as those for sustainable energy or more robust infrastructures, to prepare for dealing with these probable weather challenges.
• Our financial system is lopsided, favoring very large banking conglomerates that are shielded from competition and the dangers of their risk taking.    We have, so far, continued to socialize their losses which has removed their caution to risk taking.
• Our tax structure too much favors the incomes of the wealthy over the incomes of a majority of Americans.  Privileged rates are applied to wealthy incomes from dividends, capital gains and carried interest.  The tax laws are shot full of tax avoidance schemes designed for the wealthy like unified charitable trusts, irrevocable trusts, offshore accounts and trusts and estate taxes that avoid capital gains taxes altogether.   Combined with broad based tax cuts, these schemes guarantee high deficits and debt and the underfunding of necessary government programs like social security, medicare and medicaid.
• Our regulatory structures are too weak.  From bank risk taking, to environmental abuse, to a medical system focused on the more profitable business of treating symptoms rather than creating cures, regulators all too often look the other way or become enablers of corporations only concerned with the most profitable activity irrespective of the activity’s bad outcomes for individuals and the nation.

Beezer here.  Unfortunately one of our two political parties, the Republican party, is ‘all in’ supporting the efforts of multi-nationals.  They enable all these bad outcomes.  They support unlimited corporate campaign spending that dominates our national discussions and hides the real risks we are taking.  They favor a tax system tilted heavily in favor wealthy incomes, which in turn aggravates income inequality and suppresses both job creation and income gains for the majority of working Americans.   They pander to our want of lower taxes while endangering our needs for a safer, healthier and more competitive economy.   This is the precipice we face in tomorrow’s national elections.  If Republicans win tomorrow, then our needs will never be addressed without encountering some massive disaster of epic scale.  It’s that important.  We need to regain our ability to self-govern. 

Wendell Potter, former CIGNA executive and insurance abuse whistleblower, points out an obvious problem with Rep. Ryan’s Medicare reform using vouchers:  Health care costs have been going up at twice the rate of inflation for more than a decade, so Ryan’s vouchers won’t come close to paying for seniors’ medical care.   The current Medicare program guarantees a high percentage of health care costs payments, irregardless of inflation.  In other words Ryan’s plan will downshift an ever increasing portion of health care expenses from the federal budget to the individual budgets of the elderly.

Last month the government reported that the consumer price index had increased 1.7 percent between June 2011 and June 2012, meaning we’ve been paying on average 1.7 percent more this year than last year for goods and services. The cost of medical care, however, shot up 4.3 percent — more than two and a half times the CPI. And that was not an aberration. The cost of medical care has been rising faster than the cost of just about everything else in this country for years. That’s one of the reasons why private health insurance premiums have been increasing so rapidly. That and the fact that insurance corporations have to report a big enough profit every quarter to satisfy their shareholders and Wall Street analysts.

Health insurance premiums rose 9 percent in 2011 to an average of $15,073 for an employer-subsidized family plan, according to the Kaiser Family Foundation. Over the past 10 years, premiums have increased a “whopping” (Kaiser’s word) 113 percent, much faster than wage increases and general inflation. So you can see what almost certainly would happen to Medicare beneficiaries beginning in 2022: They would have to shell out more and more money out of their own pockets every year just to cover the premiums their private insurers would charge them.

That’s bad enough, but consider this: Health insurers began implementing a strategy several years ago to move all of us into high-deductible plans, meaning every one of us will soon be paying (if we’re not already) thousands of dollars of our own money for medical care before our insurance company will pay a dime. Insurers adopted this strategy because they have failed miserably at controlling health care costs. If you can’t control those costs, the only way you can make Wall Street-pleasing profits if you’re an insurer is to keep hiking premiums and shifting more of the cost of care to policyholders.

Under the privatized Medicare program Ryan envisions, the effect of that cost-shifting strategy would be disastrous for the growing number of senior citizens who are finding that every year they have less and less money to make ends meet.

Beezer here.  Ryan’s entire budget is aimed at slashing so-called ‘social’ spending, either privatizing it (social security), reducing it’s usefulness (medicare and medicaid), or simply doing away with it altogether (all other social spending, including programs aimed at children and women).   For the wealthy who have no need for any of these programs, this is just what the doctor ordered because it means they won’t have to bother with paying more taxes.   The problem for the average voter is that none of this will ever be revealed to them.  The GOP has enough money to drown out any such analysis under a cacophony of mis-leading if not outright false, TV commercials.  We could and should have an open discussion about how to actually ‘bend the curve’ of health care cost expenses, but the GOP has never offered anything along those lines.  Instead every savings Obama wants to make in health care costs (like getting better pricing on drugs) is labeled a ‘cut in Medicare’ by the GOP.   And, of course, the Ryan idea of substituting vouchers to shift costs down to elderly private budgets.   

It is not widely known that when Clinton left office the federal budget had been running surpluses for most of Clinton’s second term.  Bush promptly cut taxes on taking office and the surpluses evaporated and turned into ever widening deficits.  That said, here’s a good description of what was really going on when those surpluses became deficits.  When one understand where those surpluses came from, and where the deficits came from, then one understands the swindle.  From the ever present and prescient commentator bmz in a recent comment to a post by Stan Collander at his Capital Gains and Games blogsite.

The CBO projected that the surpluses Clinton left for Bush were 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. These   “surpluses” were made up entirely of excess payroll taxes building up the trust funds. 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 taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing our money.

Beezer here.  So the swindle now continues as Republicans continue to threaten SS and Medicare by cutting off funding or claiming we no longer have the money to pay for these social safety nets.   We need to raise taxes on the wealthy, if for no other reason than to re-capture the trust fund surpluses Bush transferred to the wealthy via tax cuts. 

We often cite professor Robert Reich, former Labor Secretary under President Bill Clinton, because he has the ability to distill sometimes complicated issues down to easy to understand explanations.  He’s done another good job in this regard with a recent column about the decline of America’s public institutions and public goods.  And of course he ties this decline to a corresponding decline in our attitudes towards these institutions.

From the article:

Mitt Romney speaks derisively of what he terms the Democrats’ “entitlement” society in contrast to his “opportunity” society. At least he still envisions a society.  But he hasn’t explained how ordinary Americans will be able to take advantage of good opportunities without good public schools, affordable higher education, good roads, and adequate health care.

His “entitlements” are mostly a mirage anyway. Medicare is the only entitlement growing faster than the GDP but that’s because the costs of health care are growing faster than the economy, and any attempt to turn Medicare into a voucher — without either raising the voucher in tandem with those costs or somehow taming  them — will just reduce the elderly’s access to health care. Social Security, for its part, hasn’t contributed to the budget deficit; it’s had surpluses for years.

Other safety nets are in tatters. Unemployment insurance reaches just 40 percent of the jobless these days (largely because eligibility requires having had a steady full-time job for a number of years rather than, as with most people, a string of jobs or part-time work).

What could Mitt be talking about? Outside of defense, domestic discretionary spending is down sharply as a percent of the economy. Add in declines in state and local spending, and total public spending on education, infrastructure, and basic research has dropped from 12 percent of GDP in the 1970s to less than 3 percent by 2011.

Only in one respect is Romney right. America has created a whopping entitlement for the biggest Wall Street banks and their top executives — who, unlike most of the rest of us, are no longer allowed to fail. They can also borrow from the Fed at almost no cost, then lend the money out at 3 to 6 percent.

All told, Wall Street’s entitlement is the biggest offered by the federal government, even though it doesn’t show up in the budget. And it’s not even a public good. It’s just private gain.

We’re losing public goods available to all, supported by the tax payments of all and especially the better off. In its place we have private goods available to the very rich, supported by the rest of us.

Beezer here.  Reich goes through the recent history of America’s investment in public goods and traces out the steady decline in our public good investments compared to what we did after WWII.   As incomes steadily migrated up the income ladder rather than the other direction, fewer and fewer members of the middle class or labor could afford to pay for public goods.  And those at the top of the income ladder simply moved their homes, their recreation choices, and their children into private institutions.  This decoupling of society’s big winners from public financing of public goods now leaves much of what we built in tatters.  Instead of being alarmed by this development, those with the huge incomes like Mitt Romney deride what has been weakened in our public sphere.   Thanks to economist’s view for highlighting Prof. Reich’s article.