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, 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]
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.
[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/
[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#
[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
[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/
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