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. 

The New York Times regularly runs a feature entitled Room for Debate where a current issue is debated by various experts who write short letters illustrating their viewpoints.

As everyone who follows such things already knows, Greece ran up unsustainable debts (in part because not paying taxes is the official Greek sport) under the umbrella of the European Union and its Euro currency.   A lot of that debt now resides on big European bank balance sheets.   If Greece defaults these banks are weakened and there’s concern such a hit would prove ‘contagious’ to the North Atlantic banking system as a whole, including that of the US.

Among the letters was one written by Argentine economist Alan Cibils, chairman of the political economy department at the National University of General Sarmiento in Buenos Aries.  

As an economist who lived through the Argentine crisis nearly a decade ago, I am distressed by the trouble in the euro zone because it has many of the same ingredients that led to the Argentine debacle.

The International Monetary Fund’s mistaken prescriptions (yet again) and the European Central Bank’s intransigence leave Greece no option but to default and exit the euro zone. A brief recap of the Argentine experience may shed some light on where Greece is inevitably headed.

The I.M.F. still promotes policies that inevitably make matters worse, demonstrating an inability to learn from past mistakes.

The Argentine crisis was the consequence of a decade of I.M.F.- and World Bank-sponsored free market economic reforms, which included pegging the peso to the U.S. dollar on a 1 to 1 exchange rate. This all but eliminated the ability to conduct independent monetary policy — much like the euro arrangement today. All barriers to trade and financial flows were removed, and all state enterprises were privatized. The 1994 privatization of its social security system alone explains Argentina’s explosive debt accumulation between 1994 and 2001 and the resulting default.

Argentina’s policy framework proved too restrictive when a recession set in during the last quarter of 1998. When external sources of funding dried up, Argentina turned to the I.M.F., which recommended the same austerity policies currently being promoted for Greece (and Ireland, Portugal and Spain). The I.M.F.-promoted spending cuts only deepened the Argentine recession, as any introductory macroeconomics student would have predicted. By 2001, the recession had turned into a depression, making accumulated debt impossible to service and resulting in enormous capital flight, a run on deposits and the largest sovereign default in history.

After the default and the January 2002 devaluation, Argentina’s economy continued to contract for only one more quarter. By the second quarter of 2002, Argentina’s economy began to grow and did not stop until 2009, when the global financial crisis made its impact felt there. The doom and gloom predictions of what would happen after default never materialized. Furthermore, after defaulting, Argentina no longer needed to access international capital markets, eliminating their stronghold on Argentine economic policy.

Greece (and Ireland, Portugal and Spain) should learn lessons from Argentina’s experience. First, the I.M.F. still promotes policies that inevitably make matters worse, demonstrating an inability to learn from past mistakes. Second, default can be a solution, since it can end an unsustainable situation, frees up fiscal resources for more productive use and eliminates the need for access to bond markets. And third, regaining control of the national currency and the ability to conduct independent monetary and fiscal policies are essential for economic recovery.

Beezer here.  Cibils makes the important point that contractionary policies made Argentina’s situation worse, not better.  These policies had the unintended consequence of forcing Argentina to default because they made the country’s ability to pay down debt worse, not better.    Argentina did start to recover after default because the currency was devalued (and also with the help of US ‘Brady Bonds’).  The US debt situation is nowhere near the scale that Argentina faced, but insistence that massive spending cuts are needed right now will definitely not help the US pay down debt.  As with Argentina such contractionary policies will only worsen the debt burden.   And as with Greece, cutting taxes (or in Greece’s case, avoiding taxes) will make matters worse as well.

Technically we’re out of the Great Recession.  It doesn’t feel all that good because we still have too much unemployment and growth is painstakingly slow, stretching everyone’s patience.

So what have we done so far to fight the malaise?:

• Cut taxes.  This was done in hopes the additional money in the hands of the private economy would boost lagging demand for products and services.  It looks as though this had some positive effect.  The negative effect was it increased government deficits.
• Cut interest rates, effectively to zero.  This was done in an effort to force savers out of savings and into productive, riskier investments–and to decrease the costs of new borrowing for productive investment and the cost of government deficit financing.  The negative is that the retired who live on safe bond  portfolios see a reduction in income, and Social Security dependent elderly don’t get cost of living increases. 
• A series of Federal Reserve moves intended to shore up weakened bank balance sheets.   Other than saving the banking system directly, another hope was that this would boost lending for productive investment.
• Stimulus spending for infrastructure projects.  Although a minor part of the overall stimulus spending (tax cuts being the largest component), this was the only money spent on directly hiring people.  (Editor’s note: Advisor points out that tax cuts were not the largest portion of the original stimulus bill, spending accounted for about 65% of the bill.  Infrastructure spending was half of that spending.  Since that bill, however, the lame duck Congress following the 2010 elections added more than $700 billion in additional tax cuts over the next two years.)   

Although lacking detail this list covers the choices we’ve made so far.   So what could we do in addition that might trigger economic growth, but not put undue pressure on deficits?

• Restore progressive tax tables, at minimum to those levels under President Clinton where the top marginal rate was 39.6% on income above $250,000.  This would force large savers to divert some of their inert savings into riskier, potentially more productive assets.    Additionally,  the government could pay more bills and it’s liability to insure huge undifferentiated savings would decrease.
• Establish an infrastructure bond program aimed at specific, large projects.  We have $2.2 trillion in such projects already identified across the nation, but a national goal setting project on the scale used in the 1950s to build an interstate highway system would qualify as a large enough trigger to spur economic growth.   Think  national urban commuter rail modernization and expansion, for one example.  Or a national energy transmission system modernization, for another example.    This would employ many millions in private companies nationally, a good portion of whom would come from those now unemployed.  It would improve the economy’s efficiency, and thus its global competitiveness, for decades.  Another nice positive is the bonds would help satisfy savers’ needs for income while, at the same time, turning those savings to productive use.  To the degree the projects derive revenues once built, the government’s liability to insure AAA savings would be reduced as well. 
• Use tariffs and other methods to reduce the nation’s trade deficits.  Cap and trade would raise revenue and reduce fossil fuel use.  Expanding the production and use of natural gas would decrease oil imports–a serious portion of the current trade deficits.  Subsidizing promising sustainable energy companies would create jobs and reduce our dependence on imported oil too.   

The government has cut taxes serially.  Cutting taxes even more will offer, at best, diminished returns.  To the degree they aggravate government deficits, their effect is likely to be net negative.   The Federal Reserve has pretty much run out of tools to use.

What’s not been used are progressive tax tables and direct spending on large, national infrastructure projects that would directly employ millions of workers.   We should be doing both right now.  And we should be aggressive about it.  The fastest way to end recessions and pay off debt is to grow the economy.

The Wall Street Journal highlighted five points Geithner made at a recent speech in New York.

By David Wessel

Here are five facts that Treasury Secretary Timothy Geithner offered in a speech in New York Tuesday as  “context for the [fiscal] choices we must make now to preserve room for important investments in our future.”

• In the U.S. today , 40% of children born each year are covered by Medicaid.  If you are born today in hard-pressed communities in many American cities, like St. Louis or Baltimore, you are more likely to die before your first birthday than if you were born in Sri Lanka or Belarus.

• In education, we’re losing ground…. In Los Angeles, only about half the kids graduate from high school.

• Over the next 25 years, the number of Americans eligible for Medicare and Social Security will nearly double, while the number of working age Americans will only increase by about 10%, putting substantial new burdens on working Americans.

• We spend $700 billion a year on national security… about two-thirds of what we spent as a share of our economy during the Cold War.

• The effective income tax rate for the wealthiest Americans—those earning more than $250,000 a year—is at its lowest level in 50 years. And the effective rate for the very rich—those earning over $10 million per year— has declined much further and is now around 21%.

Beezer here.  Two of these fiscal facts deal with social safety net spending in Medicaid, Medicare and Social Security.  Medicaid spending points to a problem regarding income inequality:  More and more people, particularly young people, are poorly paid and one reason for that is undoubtedly poor education.   Raising wage rates needs to be identified as an important policy goal.  Education and full employment policies that encourage domestic job creation are desperately needed.  Medicare and Social Security point to our immigration policies.  There is a need for more working age people and unless birth rates suddenly skyrocket, this means immigration policies that encourage the world’s best and brightest to come to America and prosper.  And of course we need to establish progressive tax rates rather than more tax cuts.

The best way to reduce debt is to grow.  Right now Washington seems obsessed with the idea that cutting taxes in combination with cutting federal spending is the best way to go.  Otherwise, we are told, the dollar will sink to zero value and our debts will sink our country’s value to zero.

But what if this formula doesn’t work? This formula has been in force for the past 11 years and hasn’t worked.  What happened in fact, was that deficits increased dramatically and the country plunged into a Great Recession that accelerated the pace of the existing deficits.  Now we are told to ‘double down?’

The truth is that countries seldom default because they can’t afford to pay down debt, they default because the public is convinced they cannot raise enough revenue to pay down debt.

From an economix op-ed by former IMF chief economist Simon Johnson and co-author of the best selling 13 Bankers. 

On the first day of 1791, the recently founded United States Treasury had nearly $75.5 million in outstanding debt. This was roughly around 40 percent of gross domestic product, a large amount of debt relative to the size of the economy — but not out of proportion to what we have become accustomed to in recent decades.

However, relative to federal revenues, the debt was enormous — about 20 times the amount that the government was then capable of taking in. In contrast, the total Treasury debt outstanding since 1950 has fluctuated between 30 and 90 percent of G.D.P., with the debt-revenue ratio never worse than 5 to 1 — and in recent decades between 2 to 1 and 3 to 1.

The debt-revenue ratio matters, as it is relevant to whether the country can readily service the debt. Very few countries default because they can’t afford to pay their debts, either to their own citizens or to foreigners. Defaults occur when the political process in a country determines that, for whatever reason, the government cannot raise sufficient revenue……

Most of our government spending, now as always, goes to wars and transfers to relatively poor people and to older people. The military spending will come down — if we can end the wars (as we did in the past). The social transfers were constructed in a more open-ended fashion — and our long-term budget forecasts account for this form of future spending in a more transparent and more honest way than we do for the probability of future wars or financial crises.

The real budget debate is not about a few billion here or there – for example, in the context of when the government’s debt ceiling will be raised. And it is not particularly about the last decade’s jump in government debt level. Although this has grabbed the headlines, it is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay, and on what basis, in the form of transfers to relatively poor people — and how rising health-care costs should affect those transfers.”

Beezer here.  For the past 11 years we’ve had tax cut after tax cut and the net result has been disasterous.   Still, one of our two political parties, the Republicans, maintains that we need yet more tax cuts, while at the same time decrying recession boosted deficits and supposed long term structural debt issues posed by our health care delivery system costs.   We are told we need to ‘double down’ on a formula that produced disasters.  The intellectual dissonance here is astonishing.  So when Johnson points out that historically countries default because they refuse to raise sufficient revenues, not because they don’t have sufficient income, then it certainly appears we could be approaching that position.   If the Republicans persist in resisting efforts to raise revenue then US default on debt is a real possibility.

In his most recent blog, Congressional Budget Office (CBO) Director, Douglas Elmendorf explains why we can’t simply cut spending and cut taxes in order to restore long term fiscal order.

Beezer here.  So a big driver of our imbalances is tax cutting.  Any way you figure the stats out, tax cuts aren’t paying their way in terms of raising sufficient revenue.  And unless growth accelerates markedly above projections, always a possibility, we’ll still have substantial debt even if we let the recent tax cuts expire.  Of course, it could get a lot worse too–especially if we keep thinking we can cut taxes.  If we keep on that path, then the Director spells out the magnitude of what spending cuts we’ll need.

Beezer again.  In other words a complete dismantling of the nation’s social safety nets.  Who are the Republicans trying to mislead here if not the American public?  This way lies insanity.  Who knows, maybe we are crazy.