Obama?s Politics of Austerity

Obama?s Politics of Austerity

Joseph M. Schwartz: Obama?s Politics of Austerity

Political scientists have traditionally termed Medicare and Social Security ?the third rail? of American politics: touch them (in order to cut benefits) and your political career is over. Why, then, is a Democratic president offering to slow the growth of Social Security benefits and raise the premiums paid by wealthy Medicare beneficiaries, thus likely decreasing the loyalty of upper-income voters to Medicare? President Obama?s ?triangulation? through cuts to the crown jewels of the New Deal and Great Society reflects the dominance of the neoliberal austerity mantra, which holds that the U.S. government is ?living beyond its means.? Yet if the United States, the wealthiest country in the world, had an equitable tax policy (comparable to those of most other developed democracies), we could readily afford to expand, not cut, public provisions. Given this, the Left should support raising the debt ceiling but oppose any ?compromise? that cuts funding to Social Security, Medicare, and Medicaid. The Right has said ?no? to any increases in taxes; liberals must be as bold and say ?no? to any cuts in funding for basic human needs.

In the summer of 2011, Republicans, readily joined by moderate Democrats, whipped up public hysteria about the debt ceiling and the size of the federal deficit to justify cutting popular universal social programs. These scare tactics are as cynical as they are opportunistic?conservatives militantly pushed for these same cuts when the federal budget was in surplus during the Clinton administration. The United States is not broke. The long-term structural deficit has not been caused by wasteful social spending, as the Right contends, but by the thirty-year conservative project of starving federal, state, and local governments of revenue via tax cuts for the affluent and for corporations. As conservative activist Grover Norquist quipped during the Reagan era, the goal of the Right is to reduce the size of government (?the baby?) and drown it in ?the bathtub? of declining tax revenues. Of course, the ?deficit problem? can readily be fixed without cutting Social Security or Medicare?if we enact government policies that force the rich and corporations to pay their fair share in taxes and curtail wasteful ?defense? spending.

America needs a reality check about the causes of the current budget deficit. The Republican leadership never tells the public that over half of the deficit spending from 2008?11 has nothing to do with the recession or the Obama administration?s policies. Rather, as the Center on Budget and Policy Priorities has reported, 50 percent of it is due to lost revenue from the Bush tax cuts and excessive military spending, including $170 billion per year in ?off-budget? expenditures on the unnecessary wars in Iraq and Afghanistan. Stimulus spending and the bailout of financial institutions make up just 30 percent of the deficit spending of that period, with tax revenue shortfalls due to the recession constituting the remaining 20 percent. Much of these funds will be recovered if and when economic growth resumes, while drastic cuts to vital social services will only prolong the recession.

If Congress does not raise the debt ceiling in early August, the federal government will immediately be unable to pay 35 percent of its bills, including Social Security and Medicare payments. The U.S. Treasury has never defaulted on bond payments, and it probably won?t this summer. But even a brush with default could send the global economy into a tailspin that might make the Great Recession look trivial.

Republicans and conservative Democrats are willing to play with fire because they want to use the threat of default to justify cutting government spending on social services. They especially detest public goods that remove from the whims of the market the satisfaction of essential human needs, such as health care and retirement security. The Right has long wished to gut programs such as Medicare and Social Security because they promote respect for and appreciation of the role of government in fostering a humane society.

Thirty Years of Conservative Tax Cuts: Starving the ?Beast? of Government

Government budgets are a statement of a society?s basic priorities and social values. We can readily afford social insurance for the elderly and disabled, and federal aid to children and the disadvantaged, if we raise revenues in a fair and equitable manner. The Bush and Reagan tax cuts?which distributed 80 percent of their benefits to the top 10 percent of income earners?each cost the federal coffers 2.1 percent of GDP in taxes per year, according to the Tax Policy Institute, for what today is a combined total of $600 billion a year in lost revenue. In 1960, corporate taxes constituted 30 percent of federal tax revenues; today, they make up only 7 percent. Effective U.S. corporate tax rates are incredibly low; the government only takes in corporate tax revenue equal to 1.5 percent of our GDP, compared to an average 3.5 percent for all other OECD countries. Simply restoring our effective individual and corporate tax rates to those that existed in the 1960s, the most rapid period of American economic growth, would add over $800 billion per year (in current dollars) to the federal coffers.

Is it too radical to restore tax rates to those of the Eisenhower administration? If that is a bridge too far, then simply reversing the Bush and Reagan tax cuts on the most affluent 2 percent would yield $140 billion a year in extra revenue; and abolishing federal tax expenditures on corporations (such as the oil depletion allowance and the corporate exemption from paying taxes on foreign earnings) would bring in another $120 billion. Instituting a modest financial transactions tax of .25 percent on stock, bond, and derivatives trade?the level proposed by the European Union?could yield another $200?300 billion per year. This revenue would suffice to fund Representative John Conyers? (D-MI) HR 870, a major public jobs program that would put several million of the United States? 15 million unemployed people back to work.

The same holds at the state and local level: if we taxed the top 20 percent of income earners at the same average rate that we tax the bottom quintile of taxpayers, as United for a Fair Economy has proposed, most state budget deficits would disappear. New York State Governor Andrew Cuomo has done the opposite: insisting on eliminating an income-tax surcharge on millionaires at the same time that he cut essential funding of education and social welfare programs. This is perverse; the money for these programs is there, if we tax those who have it.

Our revenue shortfalls also stem from public policies that increase income inequality, such as the conservative attack on the right to unionize. U.S. productivity has doubled over the past thirty years, but over 90 percent of the resulting income gains have gone to the top 10 percent of households. Couple that with massive tax cuts for that same top 10 percent, and you get a long-term structural deficit.

America: The Land of Small Government, Save for the Military and Prisons

Contrary to right-wing claims, the United States is the land of small, not big, government, except when it comes to prisons and the military. In fiscal year 2011, the United States will take in only 15 percent of its GDP in federal tax revenue, and another 9 percent in state and local taxes. Recessions lead to lower incomes and therefore lower tax intake. While we will take in 24 percent of our GDP as tax revenue in fiscal year 2011, we will put 30 percent of our GDP into public spending (at all levels of government). This 30 percent figure is well below the average of 36 percent of GDP channeled through the U.S. public sector in the 1960s, and it pales in comparison to all other developed nations. Neoliberal Britain is at the relative low end this fiscal year, with 31 percent of GDP as tax revenue and 36 percent being spent by government; Germany occupies a middle slot in 2011, with 36 percent of GDP as tax revenue and over 40 percent of GDP as public expenditure. In the Scandinavian countries and France, 45 to 50 percent of GDP goes to public expenditure. Why do the German, French, and Scandinavian electorates support these policies? In part, because these countries raise tax revenue in a fairer, more progressive manner than does the United States. Additionally, the affluent utilize these societies? high-quality, universal public health-care and child-care programs and thus willingly pay higher taxes.

And what does our comparatively small government spend its revenues on? The conservative propaganda machine claims that federal and state governments waste huge amounts subsidizing poor people. Yet, according to a Center on Budget and Policy Priorities report, income support and anti-poverty programs such as Head Start, Food Stamps, and Supplemental Security Income constitute only 14 percent of the federal budget. In reality, the federal government is basically an insurance company for the elderly that happens to have the world?s biggest military. State governments do most of the spending on education, transportation, and Medicaid. Medicare, Medicaid, and Social Security constitute over 41 percent of the federal budget; ?defense? constitutes another 21 percent of the budget, with payment of interest on the debt (mostly to wealthy individuals) at 6 percent. Cash transfers in the United States for unemployment insurance, Social Security, daycare subsidies, and the like amount to 9 percent of household disposable income, by far the lowest among the industrialized nations, except South Korea. We also rank next to last among the rich industrial countries in terms of social transfers that benefit the poor. In contrast, we rank first in tax subsidies for the affluent and for corporations. The rest, ?discretionary expenditure,? constitutes only 17 percent of the federal budget. This rather miniscule portion of the budget is what funds education, transportation, and public investment in energy, infrastructure, and job training. And this is the part of the federal budget that the Obama administration proposes to freeze!

The Magical Anti-Deficit Properties of Economic Growth

While the total federal debt of $14.2 trillion comes close to equaling our total GDP, the ratio of debt to GDP will naturally come down if we grow our way out of the recession. The loss in federal tax revenue due to the recession constitutes about 20 percent of the current $1.2 billion fiscal year 2011 deficit. The one-time stimulus expenditures, which saved at least 2 million jobs according to the Congressional Budget Office, represent another $250 billion of the current 2011 deficit. The stimulus comes to an end in fiscal year 2012. Whatever the wisdom of the TARP bailout of the banks, the bulk of this $700 trillion dollar program has been paid back to the federal government.

It?s not only leftists who agree with Keynes that government deficit spending must replace lost private and consumer demand during a recession. So do the bond markets. Despite right-wing claims that public debt is crowding out private capital by raising interest rates, the continued absence of strong private demand for investment capital means that real interest rates are at an all-time low, with the federal funds rate at only .75 percent and the prime rate at only 3.25 percent.

We have recent experience with the ability of the U.S. economy to grow its way out of deficits. In 1996, the Congressional Budget Office estimated that the United States would have a fiscal deficit of 2.75 percent of GDP in 2000. Instead, we ended up with almost a 2.7 percent surplus. Why? The rate of economic growth increased in the latter 1990s, in part due to the internet bubble, but also because Clinton administration policies encouraged investment and exports. The more than 5 percent swing between the projected deficit and the actual surplus is equal to more than half of the projected deficit for 2011. But we won?t achieve such deficit-reducing growth unless the federal government ends foreclosures and implements a massive public jobs program in order to shore up flagging consumer demand.

In addition, wise deficit spending should fund investments in education, infrastructure, job training, and research and development. Just as corporations use debt to invest in growth?healthy corporations often have a debt to annual income ratio of four to one?governments also should issue some debt. That is why most advanced democracies run average deficits, over the long run, of 3 percent of GDP per year (the average annual rate of growth in the twentieth century). If the economy grows faster over time than the rate of deficit spending, the total debt-GDP ratio stays the same or declines. In fact, the average ratio of total debt to GDP during strong growth periods in OECD countries ranges from 40 to 50 percent and normally rises to 60 to 80 percent during sharp recessions. When domestic investors hold much of their government?s debt, a country is simply borrowing from itself; its citizens are investing in the future of their country. In the case of the United States, over one-third of our outstanding federal debt is held by other agencies of the federal government. Foreign institutions and individuals own less than one-third of the total.

The one structural aspect of our deficit that is not healthy?and that conservatives fail to address?is that caused by our massive trade deficit. The United States needs to produce more useful goods for domestic and international consumption if we are to cease transferring our debt to foreign investors to cover our balance of trade deficits. We should also engage in international trade and labor policies that support labor rights for Chinese and other low-wage workers so they can consume more of what they produce. But we can only reverse the loss of advanced industrial production in the United States if the federal government makes investments?in infrastructure, research and development, and alternative energy and mass transit?that spur private investment in new forms of industrial output.

An Alternative Budget is Possible: The Congressional Progressive Caucus?s ?People?s Budget?

The United States can readily afford a humane federal budget that funds productive public investments for our future if we restore progressive taxation and enact prudent but major cuts in ?defense? spending. ?The People?s Budget? for fiscal year 2012 put forth by the Congressional Progressive Caucus (CPC) achieves these very goals. The People?s Budget ends spending on the wars in Afghanistan and Iraq and cuts wasteful defense spending. It thus preserves all funding for anti-poverty programs and radically expands public investments in infrastructure, education, job training, and alternative energy by $300 billion a year, while bringing the total budget into balance by 2021.

The CPC budget rejects the various ?bipartisan? budget deficit reduction commission plans that call for achieving a balanced budget through major cuts to Medicare, Social Security, and Medicaid. It also preserves the long-term viability of Social Security by simply raising the cap on income subject to the Social Security tax (currently set at $106,800) and providing a path to citizenship for the 8 million productive undocumented immigrants who often do not pay into the Social Security system.

The CPC budget also recognizes that Medicare and Medicaid can only be saved if we put a halt to corporate-driven inflation in medical costs. If we instituted a single-payer, Medicare-for-all policy that eliminated the role of private health insurers, we could lower the 25 percent of private health care dollars spent on health insurance company administration and advertising, as compared to Medicare?s 7 percent administrative costs. All other OECD countries either have single-payer insurance systems or superior versions of Obamacare (with more generous state subsidies for those who do not receive insurance through their jobs). With a greater government role in the purchasing of medical tests, equipment, and pharmaceuticals, these countries limit their total expenditure on health care to 10 to 12 percent of GDP. The United States spends nearly 18 percent of its GDP on health care and has far inferior results. We can readily afford high quality health care for all, but only if we break the power of the private health insurance industry and the corporate pharmaceutical and medical instrument lobby.

Progressive activists and intellectuals need to take on, in everyday conversations and in every public forum, the neoliberal myth about our budgetary woes?that they are caused by wasteful government expenditure. Profligate spending on the poor did not cause the budget crisis. Tax giveaways to the rich and corporations, massive military expenditure, and an out of control financial sector drove us into the Great Recession and now prevent us from enacting a budget that serves human needs. The irresponsible policies of corporate America caused the economic crisis. We can only revive the economy if we implement a fair tax system that funds vital social programs and public investment in education, infrastructure, and research and development.


Wurgraft | University of California Press Lima