Early reports about today's deal over tax cuts and other economic legislation in the lame duck session reveal that a two-percent cut in the payroll tax is to be included for one year. This is indeed a positive development. Based on Rob Shapiro's long standing advocacy for a cut in the payroll tax in order to spur job creation, Rob, Simon Rosenberg, and I wrote a memo over the summer advocating a one year payroll tax cut. Indeed, the Congressional Budget Office has said that a payroll tax cut is the most effective measure for job creation.
If today is any indication (and it is, this is a mathematical reality), the next two years are going to be difficult for those elected on the promise of cutting taxes and cutting the deficit. The fact is that you just can't do both at the same time. Policymaking is about setting priorities, and right now creating jobs and growing the economy have to be at the top of the list.
The Chair of our Globalization Initiative, Dr. Robert Shapiro, and I issued the following statement tonight:
We congratulate the Obama Administration and the South Korean government on today’s announcement on the U.S.-Korea Free Trade agreement. This agreement is in the interests of both the American and Korean people and their economies. South Korea’s strong growth has long made it an attractive economic partner, and we are pleased that that the American people and businesses will have better access to the South Korean market.
The 21st century has already been defined by a changing global economy. It is the task of America’s political leadership and economic policymakers to position the American economy for success as new economic powers rise. This agreement does just that by helping to grow American businesses and creating jobs for American workers at a time when they are sorely needed. We commend the Obama Administration for negotiating an agreement that promotes the interests of all stakeholders and levels the playing field for American goods and services.
America’s prosperity – now more than ever – rests on our ability to provide global economic leadership. Furthermore, the Korean peninsula’s security challenges, epitomized by recent events, make it all the more important that the US government stake clear ground about our interests in Asia. NDN remains committed to promoting such leadership, and will work to ensure speedy congressional passage of this agreement.
In my Fox News appearance today, the other guest repeated the right's argument that returning to the old tax rates for folks making $250,000 a year and above would be an economic disaster because we are taking money away from those who create jobs, thus slowing job creation (video here). While I gave it my best on the air today, it all got me thinking - does this argument work? Is it true? And I came up with four (now five) reasons for why I felt his argument was at best a bit silly:
1) As this story shows, what we are talking about is a less than 10 percent increase in the tax rate on monies earned over $250,000, which would result in at most a 8-9 percent increase in someone's tax bill. This is neither extreme nor onerous given the current deficit challenges we have, and simply cannot produce a dramatic economic effect even if you believed marginal tax rates deeply effect decisions like this (something our own Garrett Gruener contests here).
2) What we are talking about is a return to the tax rates in a time which produced the greatest economic boom in American history; when median income increased by more than $8,000; when poverty decreased dramatically; the market soared; and deficits became surpluses. If all that happened when the rates were at the level being proposed by some Democrats - what exactly is there to fear from this, and doesn't this utterly disprove this notion that those tax rates will inhibit growth?
In the 1990s we raised taxes on wealthy people and saw the greatest economic boom in American history. In this past decade we cut taxes on the wealthy, and saw wages and income decline, a Great Recession, a financial collapse, surpluses become huge and historic deficits, and an anaemic recovery. The case for low tax rates for wealthy people yielding positive economic results just isn't strong.
3) The Bush tax cuts were sold to the American people as something necessary due to the large surpluses the government was running at the time. It was "our money," we were told, and given the surpluses it needed to be given back to us and not hoarded or spent by the government. Well we do not have surpluses any more, and we simply can no longer afford these temporary low tax rates for people of means, particularly when their share of overall wealth in the US has skyrocketed so much in recent years.
4) Corporate profits are at record levels. Cash isn't the issue with job creation now. It is lack of demand, and businesses not hiring because they do not believe they can sell their products to tapped out American consumers.
5) The single most effective deficit fighting tool available to the Republicans today is allowing the Clinton era tax rates for the wealthy to be reinstated. Nothing else they are proposing comes even close. The GOP's rejection of this strategy once again reminds us that the "big lie" in American politics today is the right's seriousness about deficit reduction. Contrast the President's Deficit Commission Report, the many serious deficit fighting proposals from the center-left this week with the vapid bromides on deficit reduction which have come from the right in recent months. As of today there is not a single Republican Senator or Congressman who has, or can, produce a plan which will reduce the decficit even by a penny in the next 10 years. In fact, the cumulative impact of the right's budget proposals today would be to increase the deficit in the next 10 years by more than what the President has proposed.
The political struggle over how the federal budget will shape American government is now in full swing and likely to dominate Washington for the next two years. This week, the President joined the battle by proposing a two-year freeze on federal pay, his symbolic version of Bill Clinton’s maxim that “the era of big government is over.” In doing so, he aligns himself with growing public skepticism about the value of much of what Washington does. Yet, the anger driving the public debate isn’t really about federal spending much less federal pay. It’s about continuing high unemployment and stagnating incomes, because if Washington can’t get that right, what credibility does it have to manage everything else the public pays for?
There’s another, more subliminal factor feeding the public’s anger about taxes and spending, and the only accurate term for it is economic class. Most Americans are fine with rich people getting richer, even when they get richer faster than everyone else -- so long as the rest of us make progress too. But that’s clearly and painfully not the case today – the stock market and corporate profits are way up and multi-million-dollar Wall Street bonuses are back, while high unemployment won’t budge, wages are down, and the value of most people’s homes keep falling. On top of that, it was middle-class Americans who financed a recovery, through taxpayer bailouts and emergency spending, which so far seems to benefit only the wealthy. These factors alone should give Republicans pause as they prepare to block the extension of unemployment benefits and hold tax cuts for the middle-class hostage to preserving the tax cuts for the well-to-do.
The bigger political question is how most Americans would feel about the GOP’s hard-line positions, if they realized how much the economy in recent years has tilted to favor the wealthy. Recent data from the Federal Reserve document this tilt. In 2007, for example, the top one percent of Americans owned about 35 percent of all of this country’s assets or wealth – including houses, stocks, bonds, businesses, and so on – and the top 10 percent owned 70 percent of those assets. The distribution of financial assets is even more skewed: In 2007, the top one percent owned 43 percent of the total value of all bank accounts, stocks and bonds, business equity, mutual funds, pensions, and retirement savings; and the top 20 percent of Americans owned an astonishing 93 percent. Ownership of only one type of asset is still spread around fairly broadly: With 70 percent of Americans being homeowners, the bottom 90 percent owned 40 percent of the total value of all residential real estate in 2007. But that fact is no longer evidence for the conservative trope that good times for the wealthy presage good news for everyone else: Since 2007, the housing bust has destroyed about 30 percent of the value of American homes, and it was triggered by Wall Street geniuses who took the taxpayer bailouts and now are pocketing multi-million dollar bonuses.
The tilt towards the wealthy is also much less steep in most other societies. While the top 10 percent of Americans own 70 percent of this country’s wealth and assets, the top 10 percent of Britons own only 56 percent of the wealth of their nation, the top 10 percent of Canadians own just 53 percent of their country’s assets, and the top 10 percent of Germans hold but 44 percent of the assets of their nation.
The gap in incomes also has grown substantially over the last generation, and that suggests that the wealth disparities will only continue to increase. From 1982 to 2006, for example, the share of all annual income claimed by the top one percent of Americans increased from 13 percent to more than 21 percent; and the top 20 percent of us took home more than 61 percent of all the income earned here in 2006. Put another way, 80 percent of Americans have to divvy up about 38 percent of all the income generated in our economy. To be sure, a modestly progressive tax system ensures that the top one percent and the top 20 percent both contribute slightly larger shares of all federal revenues than they collect as income. But their share of federal revenues is also much smaller than their fast-growing share of the nation’s wealth.
These disparities have grown not from our politics, but from the way the economy is evolving. For example, our economy is increasingly capital-intensive – just consider, for example, how much more technology-dense most offices and workplaces are today, compared to just 20 years ago. Since capital is the source of more wealth creation than before, the wealth of those who own most of it has been growing faster. Incomes also are linked closely to the ability to work with all of that capital, increasing the income share of the top 20 percent of Americans with the most advanced skills and education. It is certainly not the burden or responsibility of government to alter the economy’s natural course. But when that course precludes meaningful economic progress for most people and creates profoundly undemocratic disparities in wealth and incomes, it surely becomes the government’s responsibility to ensure that the majority can genuinely thrive in that economy.
That’s a budget battle that President Obama could champion with confidence. For example, a good handful of subsidies for various industries would pay for low-cost access to college and graduate training for any young American with the drive and ability to see it through – as Britain, Germany and other countries, all with much smaller disparities of wealth and incomes, do. A small tax on financial transactions could float a new program of low-cost loans for homeowners with troubled mortgages, and so help stabilize the housing values that comprise the only asset of most Americans. Even a modest reform of the “carried interest” tax preference for hedge funds and private equity funds could more than pay for grants to community colleges to provide free computer training for any working person who wants it. And surely it’s time for the new realities of wealth and incomes in the United States to provide part of the framework for reforming our taxes and entitlements.
The front pages of most news papers across the country today greeted readers with the words like "GM Stock Sale in High Gear" and "U.S. Taxpayers Recover Billions in Sale of G.M. Stock." There's not a lot more that needs to be said other than what's written, but the government's backing of GM has basically turned out to be an unmitigated success. More of the investment does need to be recouped for taxpayers, and the government will still own 26% of the company, but 1.4 million jobs saved and one of the largest US IPOs in history represent a great start. I'm sure those who opposed the government's actions have changed their tune as well.
"The government is firmly in the business of running companies using taxpayer dollars. Does anyone really believe that politicians and bureaucrats in Washington can successfully steer a multi-national corporation to economic viability?" -John Boehner, June 1, 2009. http://bit.ly/9Ru4mm
Forty-nine percent of people questioned in the poll say the tax cuts should be extended for families making less than $250,000 a year, with another 15 percent saying the cuts should not be extended for anyone. That leaves 35 percent who favor an extension of the tax cuts for all Americans regardless of how much money they make.
Providing tax cuts at this point for wealthy Americans simply makes no sense. It isnt politically popular, isnt economically smart, and perhaps more than anything else, I can't really believe the Republican Party, so concerned about the deficit, want the country to borrow $700b from foreign countries to fund tax cuts for those who don't need it.
Passing just the tax cuts for the middle class makes a lot of sense. Would help provide a break to those struggling the most today. Will not hurt the economy. Is popular with the American people.
I have joined the camp that says the Democrats should draw a line in the sand on this one. Let the Republicans make their case, and expose for all to see their lack of seriousness about deficit reduction, and their top-down approach to economics. I think this is a fight worth having.
In the most recent New York Times Sunday Magazine, former Bush speechwriter David Frum puts together five "positive and productive" lessons for conservatives to act "effectively and responsibly." A sample:
Lesson 1: The danger of closed information systems. Well before the crash of 2008, the U.S. economy was sending ominous warning signals. Median incomes were stagnating. Home prices rose beyond their rental values. Consumer indebtedness was soaring. Instead, conservatives preferred to focus on positive signals — job numbers, for example — to describe the Bush economy as “the greatest story never told.”
Too often, conservatives dupe themselves. They wrap themselves in closed information systems based upon pretend information. In this closed information system, banks can collapse without injuring the rest of the economy, tax cuts always pay for themselves and Congressional earmarks cause the federal budget deficit. Even the market collapse has not shaken some conservatives out of their closed information system. It enfolded them more closely within it. This is how to understand the Glenn Beck phenomenon. Every day, Beck offers alternative knowledge — an alternative history of the United States and the world, an alternative system of economics, an alternative reality. As corporate profits soar, the closed information system insists that the free-enterprise system is under assault. As prices slump, we are warned of imminent hyperinflation. As black Americans are crushed under Depression-level unemployment, the administration’s policies are condemned by some conservatives as an outburst of Kenyan racial revenge against the white overlord....
Lesson 2: “The market” (the whole free-market system) must be distinguished from “the markets” (the trading markets for financial assets)....
Lesson 3: The economy is more important than the budget....
Lesson 4: Even from a conservative point of view, the welfare state is not all bad....
Lesson 5: Listen to the people — but beware of populism....
The irony of this piece appearing in The New York Times aside, it's a strong list. I'll just pray that it goes directly from Frum's lips to John Boehner's ears.
On Monday, November 15, NDN will host Under Secretary of State for Economic, Energy, and Agricultural Affairs Robert Hormats for an important address on global economic challenges. Secretary Hormats’ address will follow the President's trip to India, Indonesia, South Korea, and Japan, where he is speaking to America’s economic interests in the world at the G20 and APEC Summits, as well as meeting with leaders of some of the world’s most important, fast-growing emerging economies.
As new economic powerhouses arise across the world, the prosperity of Americans will increasingly depend on oursuccessful engagement with the changing economic order of the 21st century. Secretary Hormats and the State Department are central to these efforts to advance American economic interests as a key component of foreign policy. Secretary Hormats will be joined by Dr. Robert Shapiro, Chair of NDN's Globalization Initiative and former Under Secretary of Commerce for Economic Affairs.
Under Secretary of State Robert Hormats on Global Economic Challenges Monday, November 15 - 12:30pm NDN - 729 15th Street NW, First Floor Washington, DC RSVP | Webcast
I hope you will join us for this important discussion.
Instead of rehashing everything others have said, I'll focus on one aspect that needs to be left out of both this commission and future reports: "example" cuts. These cuts tend to have four main characteristics: they are spending cuts (show me a report with example tax increases), they focus on the federal government itself, they are in the discretionary budget, and they are arbitrary. They are problematic for a number of reasons:
They don't actually reduce deficits in a meaningful way - The only example cuts that exceed one billion dollars in savings in 2015 are eliminating 250,000 contractors ($18.4 billion), cutting the federal workforce by 10 percent ($13.2 billion), and freezing federal non defense compensation for three years ($15.1 billion). (More on these in point 2.) The seven other points are ticky-tack. The meat of our structural deficit problems lies in growing defense and entitlement costs - namely Medicare, which means healthcare - and a shortage of revenue.
They unnecessarily demonize the federal government and weaken it, a self reinforcing cycle - While there is valid disagreement about the appropriate role of the federal government, once a role is agreed upon, partisans of all stripes can agree that role should be properly supported and properly monitored for efficiency; no more, no less. Making the government more efficient is of course a good idea. Reducing the role of contractors is a great idea, but it bears pointing out that the role of contractors rose in part because of cuts to the actual federal workforce. Arbitrarily cutting staff and resources to set an example sets the wrong example - I'd prefer a government that sets an example of competently achieving the job its citizens have asked. When it doesn't, people lose faith in government, something I trust the public servants on the deficit commission want to avoid.
They cheapen the hard decisions that need to be made to actually reduce the deficit - One of the example cuts is "reducing unnecessary printing expenses." It's hard to find anyone in the country who doesn't agree that unnecessary printing is unnecessary. Unfortunately, deficit reduction isn't that easy - try getting everyone to agree about unnecessary weapons systems, Medicare benefits, or taxes. That's why they're called hard choices. When we cheapen them, we allow others to advance ideas veiled as deficit reduction that don't actually reduce the deficit.
The beauty of this draft is that it does take a stab at hard choices, and its writers are to be commended for that. I look forward to an end product whose only examples are of meaningful deficit reduction.