Saturday, December 1, 2012

Editorial: Stop the Grand Con

The deficit scolds, as Paul Krugman rightly calls them, have been dominating fiscal policy discussions for the past three years, calling upon the federal government to cut services to the poor and elderly to free up more money to pay for more tax breaks for the rich and corporations.

They are frauds. When Bill Clinton in 2001 turned over to George W. Bush a federal budget that was in the black and on track to wipe out the national debt in a decade, these same “conservatives” proclaimed that deficits didn’t matter. Bush enacted two tax cuts and pursued two wars without bothering to pay for them, which increased the national debt upwards of $5 trillion.

Conservatives who supported Bush’s $700 billion Wall Street bailout in 2008 didn’t “come to their senses” until after Barack Obama took office in 2009 and started trying to save the American auto industry and stimulate the economy, which, in addition to the health reform and other discretionary spending, cost about $1.44 trillion. Republicans resisted him at every step. Now that the economy has stabilized and corporations are banking profits, the unemployment rate is still hanging around 8% and there is still plenty of work to be done rebuilding our roads and bridges and other critically needed infrastructure to 21st century standards. But “conservatives” say we can’t put those people back to work because it would increase the deficit — even though the Treasury is able to borrow at near-record low interest rates.

Goldman Sachs CEO Lloyd Blankfein and Honeywell’s David Cote get extra gall points for making the case to cut the deficit by severely scaling back social safety-net programs, such as Medicare, Medicaid and Social Security. Goldman Sachs got $10 billion in federal bailout cash. Now that it is back in the black, Goldman Sachs is looking for a tax break on offshore profits that could save it $3.3 billion when it brings the profits home. Honeywell had $2.3 billion in federal contracts in 2011 alone and it is not interested in giving discounts for government work.

Blankfein called for cuts in Social Security and other “entitlements” in an interview with CBS News Nov. 19. He said Social Security “wasn’t devised to be a system that supported you for a 30-year retirement after a 25-year career.” That surprised many of us who figure to work more than 40 years before getting to retire. But the key to cutting Social Security, Blankfein said, was simply a matter of teaching people to expect less.

“You’re going to have to do something, undoubtedly, to lower people’s expectations of what they’re going to get,” Blankfein told CBS, “the entitlements, and what people think they’re going to get, because you’re not going to get it.” Blankfein made $16.1 million in 2011 and, like all millionaires, gets dinged by the Social Security payroll tax only on the first $110,100. Seniors might not need to expect less if we just lifted the cap on taxable income and multimillionaires like Blankfein paid their fair share.

Cote, whose compensation in 2011 was more than $55 million, suggested in a CBS interview Nov. 20 that the government raise revenue by ending individual tax credits and deductions, including mortgage and charitable deductions that the middle class uses. Cote added, “The big nut is going to have to be [cuts to] Medicare/Medicaid … especially with the baby boomer generation retiring. It’s going to literally crush the system.” (Particularly if we let multimillionaires bank their dividends at bargain tax rates.)

But what Cote really wants is a corporate tax rate of zero. In May he said in an interview in May, the only reason his desired rate won’t happen is because “from a fairness perspective, nobody would be able to stand it.”

Cote’s belief that a low corporate tax rate will spur job creation stands at odds with the country’s current experience, Pat Garofalo noted at After all, US corporate taxes that were actually paid (the effective rate) fell to a 40-year-low in fiscal year 2011, despite corporate profits rebounding to their pre-Great Recession heights. However, job creation has been stubbornly slow.

In a New York Times op-ed column (Nov. 25), billionaire investor Warren Buffett noted that higher tax rates are not likely to deter investors. During the early 1950s, when the capital gains rate was 25% and marginal rates on dividends were as high as 91%, he did well as a securities broker. “In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70% — and the tax rate on capital gains inched up to 27.5%. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.”

In 1992, the tax paid by the 400 highest incomes in the US averaged 26.4% of adjusted gross income. In 2009, the most recent year reported, that rate was 19.9%, he noted. “It’s nice to have friends in high places,” he added.

That top 400’s average income in 2009 was $202 million, he noted. Yet more than a quarter of these ultrawealthy paid less than 15% of their tax in combined federal income and payroll taxes. A few actually paid nothing.

Buffett supports President Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers, although he prefers a cutoff at $500,000 instead of $250,000. But he also suggests a minimum tax on high incomes of 30% on taxable income between $1 million and $10 million and 35% on amounts above that. “A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours,” Buffett wrote. “Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.”

Democrats don’t need a deal at any cost in the lame duck session. Wall Street bet on Romney and the Republicans in the election and now the Democrats don’t owe them anything but “good government” and Elizabeth Warren on the Senate Banking Committee. They shouldn’t go along with any “Grand Bargain” that cuts Social Security, Medicare or Medicaid benefits.

America’s plutocrats have tried to scare the middle class with the specter of China threatening to foreclose on our burgeoning national debt. In fact, China owns about $1.15 trillion in US Treasury notes, or 7% of the US national debt, according to the Treasury Department — and that is good for us. Instead of cutting domestic spending to marginally reduce the federal deficit, as the Republicans are calling for, we should be proud to sell China more Treasury bills to help us pay the $2.2 trillion the American Society of Civil Engineers estimates it would take to rebuild our infrastructure and put 12 million jobless Americans back to work.

China is buying our debt not because they’re good guys, but because they need to invest their profits somewhere, and the US Treasury is the safest investment in the world (at least until Republicans start threatening the faith and credit of the Treasury). As of Nov. 26, the 30-year Treasury bond rate was 2.8%. Investing in the US also helps keep down the value of the Chinese currency, the yuan. That keeps Chinese exports less expensive and more attractive to western consumers. Chinese leaders need American workers to be prosperous enough to buy the consumer goods that are made in Chinese sweatshops.

Consequently, the Chinese economy would suffer as much, if not more than the US if China stopped buying our debt. And, contrary to popular opinion, China can’t demand that we give them San Francisco in return for their T-bills. Instead, they can dump that paper on the world market. That might cause Treasury prices to fall, but that not only would reduce the value of China’s remaining Treasury holdings; it also might slow down the US economy, so we might not be able to buy as many Chinese goods as we used to. And with 1.3 billion Chinese consumers having greater expectations of a higher living standard, driven by trade with a healthy United States, the Chinese leadership is not likely to start a war with their best customer. — JMC

From The Progressive Populist, December 15, 2012
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