The Debt Crisis: Raise Taxes or Cut Spending?

Alan Greenspan once told Congress that the biggest danger we faced was that we might pay off our debt too fast. Today, he is working with the group called “Fix the Debt” to pay off the debt as fast as possible.  So, what changed?

Greenspan flipped sides because America has, among other things, a ballooning debt problem.  Part of those problems go back to the tax cuts passed in 2001 and 2003, both of which were passed by a Republican controlled Senate using reconciliation. Reconciliation is a tool that can be used by the majority party in the U.S. Senate to pass legislation by a simple majority instead of the normally required three-fifths majority.[i]   The 2001 tax cuts passed 58-33, when all the Republican senators (with the exception of John McCain, R-Ariz.) were joined by 12 Democrats to pass the measure.[ii]  The 2003 tax cuts were passed at a point when the wars in Iraq and Afghanistan were already underway, followed by Congress passing a Medicare prescription drug benefit to boot. Those tax cuts passed by a vote in the Senate of 51-50, with only two Democrats joining the Republicans and vice president Dick Cheney stepping in to break the tie.[iii]

 The 2001 tax cuts affected income categories across the board but since the wealthy pay the most taxes, they received the significant portion of the benefits. The 2003 tax cuts, which included a number of measures, provided the most significant reductions in taxes on dividends and capital gains. Typically, these taxes are on investment income, which means such cuts tend to give a bigger break to taxpayers with higher incomes.[iv]   The wealthy, therefore, benefited more than anyone else from both tax cuts, since they make and have more money by comparison, but they benefited the most from the tax cuts in 2003. In fact, over 80 percent of the income gains in the years that followed were concentrated in capital gains.[v]

EFFECTS ON MARKETS

The tax cuts did produce some stock market gains during the Bush administration but those gains failed to translate into explosive job growth over that same period.  "According to the non-partisan website PolitiFact, employment levels under President Bush grew between 4.5 percent and 7 percent, depending on the employment model you choose from the Bureau of Labor Statistics. When compared with other two-term presidents, that figure represents the slowest job growth since the Eisenhower administration." Likewise, unemployment levels were also largely unaffected by the tax cuts."[vi]

 

If we compare the markets under Bush to Obama today, for example, we find:

• G.W. Bush - negative 3.5 percent annually
• Obama - positive 20.1 percent annually

It is a fact, in other words, that the US stock market has performed better under Obama than G.W. Bush by a staggering 23.6 percentage points a year.[vii]

EFFECTS ON DEBT

Bush took office with a $230 billion budget surplus and left with a $1.2 trillion deficit. (NOTE: The "deficit" is based on the annual budget and the "debt" is essentially the total amount the U.S. owes in accumulated budget "deficits." While Bush came into office in 2001 with an annual budget surplus - thanks to Clinton - the national debt at that time was around $5.8 trillion.)

In 2001, the Congressional Budget Office had estimated that the government would wipe out its debt in 2006 and be $2.3 trillion in the black by 2011. But after a recession, the Bush tax cuts, 9/11, two wars, and the financial crisis, the reality was rather different: We were $10.1 trillion in the red. [viii]  If you calculate the cost of all of those cuts (i.e. the tax dollars that would have been collected if the rates had remained unchanged), the figure is $1.812 trillion over the length of the Bush administration. That is the largest "new cost" to the government under Bush, even larger than the $1.469 trillion spent on the wars in Afghanistan and Iraq.[ix]

 

 As Duncan Black points out, “the Bush experience tells us something important about fiscal policy: namely, that when Democrats get obsessed with deficit reduction, all they do is provide a pot of money that Republicans will squander on more tax breaks for the wealthy as soon as they get a chance.”[x]

The Congressional Budget Office estimates that the budget deficit will grow by $3.9 trillion over the next 10 years if the Bush-era cuts are permanently extended. If all cuts had expired at the end of 2012, however, the budget deficit could have dropped from $1.1 trillion in 2012 to $585 billion in 2013 and $345 billion in 2014[xi]

The two sides reached a last-minute agreement in December 2010 to extend all tax cuts until the end of 2012. In the meantime, the president called for a Congressional "super committee" of Republicans and Democrats to find a way to reduce government borrowing by $1.2 trillion over the next decade. The super committee talks broke down when the two sides couldn't agree over what to do with the Bush-era tax cuts. Again, the Democrats called for an end to the tax cuts for the wealthiest Americans, while the Republicans insisted that all reductions be made through spending cuts.

In October, Republican refusal to consider tax increases led to the government shutdown. That refusal has also led many to claim that Republicans are not interested in reducing the debt or the deficit, but are simply using the idea of “deficit reduction” as a "smokescreen" to push an agenda of more tax relief for the wealthy.  

After all, as Timothy Noah explained, when we look at all the evidence "it seems to lead to one inescapable conclusion:"

“The GOP is not interested at all in tax reform, and it's only mildly interested in deficit reduction. It is mainly interested in tax reduction. All you need to do is look at the history of the past thirty-two years. The GOP has intermittently been interested in lowering the deficit whenever a Democrat was in the White House, but it has always been interested in lowering taxes. It has never not wanted to lower taxes. That's how they got so low!”[xii]

In October, Peter Beinart seconded Noah’s sentiments by explaining how, “for most Republicans, deficit reduction is (in fact, just) a smokescreen.”

 What they really want is “smaller” government, by which they mean government that taxes less and spends less on domestic programs. (On defense, Republican small government orthodoxy tends to wane.) Republicans want smaller government when deficits are high and when deficits are low. But when deficits are high, they pour old wine into new bottles and pretend that smaller government and deficit reduction are the same thing.[xiii]

IS "DEFICIT REDUCTION" JUST A REPUBLICAN SMOKE SCREEN?

Peter G. Peterson is the guy, far more than most, who has managed to transfer his hatred of paying taxes into a national fear of Medicare, Medicaid, and Social Security 

    "The Campaign to Fix the Debt is the latest incarnation of a decades-long effort by former Nixon man turned Wall Street billionaire Pete Peterson to slash earned benefit programs such as Social Security and Medicare under the guise of fixing the nation's "debt problem." ...  Even before the 2012 Campaign to Fix the Debt, Peterson poured millions into a multifaceted effort to support the Simpson-Bowles Commission and its $4 trillion austerity package, a plan that would cost the nation four million jobs, according to the Economic Policy Institute, and "destroy Social Security as we know it," according to Social Security Works."[xiv]

Beinart makes a valid point, but it may not necessarily be a "smokescreen" to try to lower your own taxes by reducing the deficit, especially if it is, in fact, your taxes that may well be used to reduce that deficit. Instead, it may just be an example of how the wealthy, who have their own unique perspective on the world, use a different vernacular when discussing it.

  

SPENDING PROBLEMS

In part, people like Peter G. Peterson and the Republicans are right. Federal entitlement spending over the past 50 years has grown significantly, but it has done so more under Republican presidents than under Democratic presidents.

As Nicholas Eberstadt wrote in the Wall Street Journal, “entitlement spending in 2010 at all levels of government totaled $2.2 trillion. That equals $7,200 for every man, woman and child in the country. It approaches a staggering $29,000 for a family of four.”  Eberstadt, however, summarizes the past 50 years this way:

From a purely statistical standpoint, the growth of entitlement spending over the past half-century has been distinctly greater under Republican administrations than Democratic ones. Between 1960 and 2010, the growth of entitlement spending was exponential, but in any given year, it was on the whole roughly 8% higher if the president happened to be a Republican rather than a Democrat.[xv]

FIXING THE PROBLEM:  TAX INCREASES VS SPENDING CUTS

The difference between Republicans and Democrats when it comes to deficit reduction is this: Republicans are obsessed with the debts, deficits, and spending, side of the Economy Coin and totally discount and tend to ignore the other side of the Coin that Democrats also try to focus on, which is jobs, investments, and revenues.[xvi]  Since the debt is essentially a total amount of accumulated annual deficits, considering both is important when trying to find a solution.[xvii]

On the one hand, the deficit,  according to the Nobel Prize winning professor of Economics from Princeton, Paul Krugman, “is a side-effect of an economic depression, and the first order of business should be to end that depression — which means, among other things, leaving the deficit alone for now."

Krugman has a point. As the chart below shows, the deficit, as a percentage of Gross Domestic Product has been going down since 2009. And if we continue to strengthen the economy it will continue to decline, even without the kind of major spending cuts Republicans are calling for.

On the other hand, Krugman explains that the problem with the debt comes from the “weakness of the economy,” which “has led directly to lower revenues; when G.D.P. falls, the federal tax take falls too, and in fact always falls substantially more in percentage terms.” For Krugman, this means it is “likely that full economic recovery would raise revenue by at least $450 billion.” Hence, he adds:

 The depressed economy has also temporarily raised spending, because more people qualify for unemployment insurance and means-tested programs like food stamps and Medicaid. A reasonable estimate is that economic recovery would reduce federal spending on such programs by at least $150 billion. …Putting all this together, it turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances at all. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery. [xviii]

Chairman of the Federal Reserve, Ben Bernanke appears to agree with Krugman that focusing purely on deficit reduction would do more harm than good to America's current economy. “Given the still-moderate underlying pace of economic growth,” Bernanke says, “this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”[xix]  Republicans who believe large spending cuts are the only answer may find it easier to achieve their goals by paying more attention to Democrats who agree to some spending cuts but argue that budget cuts must be balanced with increased revenue from taxes.

Krugman and Bernanke are not the only ones suggesting spending cuts may be the wrong approach to deficit problems. The International Monetary Fund (IMF), for example, "set off shock waves ... in Washington" in October "by suggesting countries fight budget deficits by raising taxes" on the rich and better targeting the multinationals. The IMF "typically calls for nations in difficulty to slash public spending to reduce their deficits. But in its Fiscal Monitor report, subtitled “Taxing Times,” the Fund advanced the idea of taxing the highest-income people and their assets to reinforce the legitimacy of spending cuts and fight against growing income inequalities. "In the US alone," the global lender said, "legal loopholes deprive the Treasury of roughly $60 billion in receipts."[xx]

As Krugman cautions, we “should recognize all the hyped-up talk about the deficit for what it is: yet another disingenuous attempt to scare and bully the body politic into abandoning programs that shield both poor and middle-class Americans from harm."

THE DEFICIT REDUCTION OBSESSION

If Deficit Reduction is Not a Smokescreen, then Why the Obsession?

"Kevin Drum points us to Larry Bartels and Benjamin Page to try to explain why Washington is obsessed with budget deficits — and not, say, income inequality, climate or just plain old unemployment. As Bartels and Page point out, the wealthy have different political views from everyone else and yet have quite a bit more influence with politicians." As Drum explains:

So if you’re wondering why official Washington is all atwitter over budget deficits, but doesn’t seem to care much about unemployment, this is why. It’s because that’s what rich people care about.

More on the question of why Republicans are so obsessed with budget deficits can be found here, but basically, it may stem from an almost religious devotion to the church of "trickle down" Reaganomics that leads such Republicans, much like Reagan himself, to believe that tax cuts are the panacea for every economic problem under the sun, regardless of whether this is true or not.[xxi] And even though Reagan was a true believer, the Pope is not. 

Just this week, in fact, the Pope called "trickle down" economics an "opinion, which has never been confirmed by the facts," but instead, simply "expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."[xxii] And since Catholic Republicans constitute 61 seats in the House and 9 in the Senate, one would hope, if they are unwilling to listen to Democrats, that perhaps they may consider listening to the Vicar of Christ on earth.[xxiii] Otherwise, after they finish trying to sue the President over immigration and healthcare, they may have to consider suing God for creating money.  

 

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[i]  http://usconservatives.about.com/od/glossaryterms/g/Reconciliation-Process-Defined.htm The federal budget reconciliation process is a legislative device employed by the U.S. Senate to end a filibuster, close debate and pass controversial budget bills, thereby circumventing the three-fifths rule. Because reconciliation only requires a simple majority, it is a tool primarily used by the majority party. Although the House has a similar procedure, its is rarely used since rules are regularly introduced to prevent protracted debate.

[ii] http://www.politifact.com/truth-o-meter/statements/2010/mar/04/alan-grayson/bush-tax-cuts-were-passed-reconciliations-50-votes/

[iii] Id.

[iv] http://www.politifact.com/truth-o-meter/statements/2010/mar/04/alan-grayson/bush-tax-cuts-were-passed-reconciliations-50-votes/

[v] Id. source: Congressional Budget Office

[vi] http://money.howstuffworks.com/bush-era-tax-cuts2.htm

[vii] http://www.cbsnews.com/news/stocks-bush-vs-obama/

[viii] http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/21/how-republicans-stopped-worrying-and-learned-to-love-big-government/

[ix] Id.

[x] http://krugman.blogs.nytimes.com/2012/12/29/on-the-economics-and-politics-of-deficits/

[xi] http://money.howstuffworks.com/bush-era-tax-cuts2.htm

[xii] http://www.newrepublic.com/article/112567/john-boehner-doesnt-care-about-deficit-reduction

[xiii] http://www.thedailybeast.com/articles/2013/10/21/republicans-don-t-really-care-about-reducing-america-s-debt.html

[xiv] http://www.dailykos.com/story/2013/02/24/1189480/-Someone-should-Fix-this-Billionaire-s-influence-on-America

[xv]http://townhall.com/columnists/johncgoodman/2012/09/08/which_party_is_the_party_of_big_government/page/full

[xvi] http://www.dailykos.com/story/2013/03/02/1191049/-Republicans-are-Debt-obsessed-Economy-Squashers# 

[xvii] http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/24/the-gops-worst-cliff-myth/

[xviii] http://www.nytimes.com/2012/12/17/opinion/krugman-that-terrible-trillion.html?adxnnl=1&adxnnlx=1386176400-mOWc4n98S0fl5UVzPDt4cg

[xix]http://www.nytimes.com/2001/05/27/politics/27TAX.html?ex=1233378000&en=89f53bc5770cc55e&ei=5070 

[xx] http://crooksandliars.com/susie-madrak/tax-rich-imf-report-shocks-establishm
[xxi] http://www.washingtonpost.com/blogs/post-partisan/wp/2013/03/22/why-the-budget-deficit-obsession/
[xxii] http://thinkprogress.org/economy/2013/11/26/2997451/pope-francis-trickle/
[xxiii] http://www.pewforum.org/2012/11/16/faith-on-the-hill-the-religious-composition-of-the-113th-congress/