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Tuesday, January 21, 2014

NY Review author details extent of government financing crisis & a centrist way out

By Marc Jampole

If you read one article this month—change that to this year—make it Jeffrey D. Sachs’ “Our Dangerous Budget and What to Do About It” in the New York Review of Books. 

Sachs, Director of Columbia University’s The Earth Institute, takes a look at the federal budget and tax revenues as percentages of the Gross Domestic Product (GDP) and compares the numbers to historic patterns and what the numbers are in other countries. He then makes assumptions about future inflation and concludes that within 10 years the federal government will be spending money on the military, interests payments on debt, mandatory social programs such as Social Security, Medicare and Medicaid and nothing else. No aid to education. No construction or repair of bridges, roads and dams. No support of alternative energy. No national parks. No federal support of medical or scientific research. No National Science Foundation. No weather satellites. We will cease investing in the future of the United States and the result will be that we enter a rapid decline.

He starts with the fact that federal, state and local tax revenues are now a mere 30% of GDP, much less than before what he rightfully calls “Ronald Reagan’s successful assault on government beginning in 1981,” and much lower than Canada’s 38%, Germany’s 45% and Denmark’s 55%.  We average a mere 18-20% a year of GDP in federal taxes.

Sachs takes a look at the federal spending pie and finds that mandatory programs accounted for 9.6% of GDP in 1980, but have soared to 13.6%. The aging of the population and the fact that people are living longer has a lot to do with that increase, but so does medical inflation. Sachs tell us that we spend 18% of GDP on health care, compared to 12% in other high income countries, although he forgets to mention that these other countries all have longer life spans and lower infant mortality.

Adding the 5% of the GDP that we spend on military and that adds up to almost 19% of GDP, or just about all of our federal revenues. That doesn’t leave much for all that other stuff I listed above.

But wait, it gets worse! Thanks to the Federal Reserve Board’s program of quantitative easing, interest rates have been historically low. Quantitative easing has to end and it looks as if it may end sooner than later. When the Fed does pull the plug on bond buying, interest rates will return to what Sachs expects will be an historically normal 4%. At that point, interest on the national debt will account for 3.1% of GDP. By 2023, if we do nothing, we will have absolutely no money to spend on anything but guns, health care, retirement and interest.

Sachs lists four ways out of this untenable situation, three of which he rejects:
1.      Continue on the current course, which will doom us to a backwards economy with unskilled people in a degraded environment.
2.      Fund more of what the beltway crowd label discretionary spending through borrowing more money.  Sachs worries about the increase in the debt to GDP ratio. I worry more about the fact that borrowing money to fund government spending transfers money from the poor and middle class to the wealthy, even when the money is spent on these less financially secure groups. Here’s why: Instead of raising taxes on the wealthy, we borrow money from them, giving them a rock solid investment. The loan and all interest are eventually paid back by all of us.
3.      Cut spending on Social Security, Medicare, food stamps and other “mandatory programs” (which essentially means programs for which spending levels are voted into law not subject to annual budgeting) to fund the discretionary programs like education, environmental protection, infrastructure improvement and research. As Sachs points out, the Republicans like this approach, but he forgets to mention why: because it takes from the undeserving (read: minority) poor.

Sachs’ approach is the right one: Raise taxes and cut military and healthcare costs. He proposes a one percent wealth tax on any individual with a net worth of $5 million and more, a tax on financial transactions and the end of preferential tax treatment of multi-national corporations and hedge fund owners.  His military cuts leave the United States as the preeminent military power in the world, with offensive capabilities much greater than any other nation.  His medical cuts do not bring our medical costs down to European levels and involve changing how we pay for health care from a fee-for-service model to one price for every patient.

With this combination of cuts and tax increases, Sachs is able to squeeze out 5% of GDP to invest in education, technology, infrastructure, jobs, mass transit and everything else in which we currently need to invest.

Sachs plan is too centrist, if you ask me. A lot of damage has been done over the last 30 years by privatizing money—taking it out of the public coffers where it was used for public ends and giving it to the wealthy, thin sliver of the  population who didn’t really need it. I would also propose lifting the cap on income assessed the Social Security tax and end the capital gains tax for any investment in the secondary market (as opposed to buying an initial stock or bond offering). I would also raise the basic tax rate on just about everyone making more than $150,000 a year. I would cut the military even more than Sachs proposes. I would use these additional revenues and cost savings to ratchet up investment in education, mass transit and the environment.

These differences are more than minor quibbles—they represent the difference between a pre-Reagan American centrist and a European-style social democrat. But Sachs’ proposal is a good start, and it seems to be considerably to the left of our supposedly progressive President.

Sachs ends with the hope that there is truth in Arthur Schlesinger Jr.’s well-known statement that we have 30-year cycles of private greed followed by 30-year periods of public service.  He sees the election of Bill De Blasio as Mayor of New York City as a possible harbinger of a swing leftward.  Judging from the many surveys by Pew and others, Sachs may be a little too optimistic. The country has been tilting left for years, but even as it does our politicians have driven the conversation right and one of our two major parties has attempted to disenfranchise those voters most likely to vote for progressive candidates. Days after De Blasio’s inauguration, the Governor of New York state—a Democrat—came out with a plan to cut taxes in that state further.

Considering our current political alignment, Sachs plan looks pretty good. I suggest that everyone copy it and send it to all their elected officials with a note that if they want the vote and donations, they have to come out explicitly and loudly for the Sachs plan.

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