How Much Harm Will it Do?

Stan Duncan

Now that we have raised the debt ceiling (or paid off the hostage-takers, depending on your point of view) it might be a good time to review how much damage the deal will do to the economy, to the recovery, and to ordinary people trying to hold down jobs.

Before I try to total that up, here is a brief overview of how we got here. You can skip down if you already know all of this.

Where did it come from?
Our US debt itself (the fact that we have borrowed money) has been around for a long time, but the deficit (the fact that we spend more than we make) was pretty much eradicated during the Clinton years. When president Clinton left office we had a surplus of about $412 billion and we were on track for eventually paying down the total debt itself (which was about $8 trillion). When President George Bush left office eight years later, the entire surplus was gone. The deficit had grown to over $500 billion, and the debt was around $14 trillion.


Liberals and conservatives argue over how much influence President Clinton or the high tech explosion had to do with that, but the fact remains that we had a surplus during his administration. He raised taxes and social spending and unemployment went down. And when people are employed they pay taxes. Remember that part: when people are employed, their taxes pull down the deficit.

President Bush had two unfunded wars, three unfunded tax cuts (one in the spring of 2008 that no one talks about), an unfunded prescription drug program, and a recession. The unfunded programs and tax cuts were like paying money out and the recession kept money from coming in (actually the recession did both: tax revenue went down and expenditures for unemployment insurance, food stamps, etc. went up).

At the end of 2008 and the beginning of 2009 both the Bush and Obama administrations spent hundreds of billions in stimulus to help stave off an economic meltdown. However, a good amount of President Bush’s spending was in loans to Wall Street, which have been paid back, and much of Obama’s was for jobs, which came back in terms of workers paying taxes, so in the long run neither of their programs impacted the deficit in the way that the wars, tax cuts, the drug program and recession did. Economists differ on how much all of these things drove up the deficit (see my previous post on that), but by any estimate except Rush Limbaugh’s, when President Obama took office the US deficit had soared upwards by trillions of dollars.

To be fair, this description of the origin of the deficit comes mainly from economists and observers from the right, left and center. There is an alternative view from people like Senate Minority Leader, Mitch McConnell (R-Ky), who argues that the deficit is the result of the “out of control spending” of unnamed members of Congress (apparently Democrats) between 2000 and 2008, and the “Job-killing tax increases” that President Obama might be pushing on us one of these days. Even though evidence for this view is difficult to come by, it seems to be the predominant opinion held by the media, the White House, and both houses of Congress.

So, where are we now? 

At the beginning of 2011, the Republican leadership in Congress announced that they had kidnapped the debt ceiling and would not let it go free until they had been paid an astronomical ransom in cuts in social spending. And if the Obama administration did not agree to their demands, they would blow up the economy by refusing to allow the federal government to borrow money. That act would throw our tepid recovery back into a deeper recession, families and jobs would be ruined for decades, and our future as a global economic player would be in jeopardy. They didn’t really want to do it, they said, but they had no choice because otherwise somewhere a few decades from now there might come a time when someone might get hurt if they didn’t do it. (They didn’t put it in quite those terms, but you get the idea.)

It is a form of what I call “Economic Apocalypticism,” the belief that we need to cause a catastrophic human apocalypse right now, with pain, suffering, and hunger, in order to create a pure capitalist order generations from now for our grand children. As examples of this, look at the draconian cuts in social spending imposed on poor and developing countries in the 1980s by the IMF and the resulting rises in poverty, homelessness, and illiteracy. It is sometimes referred to as “Shock Treatment” by economists like Jeffrey Sachs and others. It means: cause agony and death for hundreds of thousands of innocent people right now on the gamble that their grandchildren might be able to claw their way back into a middle class life years from now. The theory was common currency in the economic development circles of two decades ago and is apparently also behind the death threats of Congressional Republicans today.

The Democrats and the Obama administration inexplicably believed that the Republicans were not bluffing in their threats to destroy the economy, and moved into protracted hostage negotiations over how much to give up to keep them from killing the planet. Then, according to House Speaker John Boehner (R-OH), Congress agreed to ninety-percent of their demands, with an additional promise that a bi-partisan panel will be set up to decide how much more will be given to them later.

So, what is the damage?

Let’s begin by acknowledging that cuts in social spending will hurt the economy and drive up the deficit. We often hear that it will, of course, also cut the deficit, but not by as much as you think because the people you fire will no longer pay income or sales taxes. Firing people can lower the deficit, but it also to some degree increases it—that in addition to causing fear and pain to millions of innocent families. Cutting social spending in the middle of the worse job losses in seventy years is much like bleeding hemophiliacs to see if it will help them get well. It wasn’t successful in the 1200s, and it probably will not work today.

How much damage will it do? First, the debt reduction plan will cut $3 trillion from Federal spending over 10 years. That comes out to about $300 billion in spending reductions per year. The higher amounts of that, however, are set to be cut in future years so that people won’t feel as much of it before the elections, so for our present numbers let’s assume that only $100 billion will be cut next year.

So, deduct that $100 billion from our annual spending, which is presently around $3.5 trillion, and it will shrink the GDP by about 3%. (The math is 100/3,500.) That, by the way, is probably a bit low because it doesn’t take into account the “Multiplier effect.” Every time a dollar changes in hands there is a value added to it, which adds to the GDP. Direct Government expenditures can increase the GDP by anywhere from 1.20% to 1.75% (tax cuts, on the other hand, are usually a loss). So, the overall loss to the economy is probably larger than my simple equation.

According to a rule of thumb called “Okun's law,” if the GDP is depressed by 3%, then the unemployment rate should go up by about half that, or 1.5%. That is of course, assuming that only jobs will be cut and not waste, so to be fair, let’s assuming that in this first year we will only drive up unemployment by 1%.

Right now unemployment in America is 9.2%. Add another one percent to that and we get 10.2%. What this means is that the number of jobs lost by this act then, comes out to be about 1.5 million jobs next year. And that’s just at the start. More government-caused job losses are to come. Each year they will get larger; each year we will depress the GDP further and hurt families deeper.

Already cut backs in jobs and benefits on state and local levels are one of the major contributing factors in our high unemployment and low tax revenue and the first line of hurt will be state and local governments. One out of every three dollars of state spending comes from the federal government — $478 billion alone in 2010. That will definitely be cut. In the first half of 2011 almost all of the job gains in the private sector were lost again by firings in the public sector. From August 2008 to the present, over 577,000 jobs have been lost to government belt-tightening.

Some of the biggest items that are to be cut in the bill are spending on education and Medicaid for the poor That won't hurt many in Congress, who are generally richer than "average" Americans and prefer private schools for their children, but for the rest of us, it could be one more step in our national decline. Note that nearly every state government has already set its budget for the next two years assuming a certain amount of federal dollars to come in. With this bill, all of those programs will have to be cut back. Local governments will probably try to raise property taxes to raise revenue, but that would be one more drag on the housing market that’s already dragging the bottom. Many local municipalities are already filing for bankruptcy and that will accelerate depending on how fast Washington’s cuts begin impacting them.

As long as we believe that the pain and fear of our recession is not related to Wall Street gambling, Mortgage loan scandals etc., but out-of-control spending by God knows who in our pasts, and that the only way out of it is through cuts in taxes for the wealth and benefits for the poor, and that the only way to find God’s final realm for the next generation is by balancing our checkbook on the backs of the poor, the sick, the elderly and the very young, then we will continue to decline into what looks from this side as an abyss of madness and evil…but that’s just my opinion.

Tax the Rich: It’s Actually Pretty Good For Them Too

Stan Duncan

A number of economists of both the right and the left have said that we can no longer sustain the Bush-era tax cuts and allowing them to expire is the only way to cut into the budget deficit. The biggest difference between conservatives and the liberals on this (when there actually is one) is that the conservatives--who include Alan Greenspan and David Stockman, architect of the huge Reagan tax cuts of the 1980s--say that we should let all of the tax cuts expire and the liberals say we should cancel just those of the top two percent. And many liberals actually agree on that too. Some conservatives, like David Brooks agree that the tax cuts have to go, but think we should phase them out over two years. I think they should go now, but I could live with that as a compromise.

  Taken together, this is a fairly strong consensus, with the differences being nuances over timing and degree, not over principle. It makes one wonder how the Republican/Fox/talkshow/pundits were able to say with a straight face that ALL of the logic was on the side of keeping the tax cuts. Or it causes one to ask how it was that the Democrats so seriously failed to make the case for an alternative to the story.

  At the risk of sounding like simple Econ 101, here is the basic outline of why higher taxes for the wealthy make sense for everyone, including the wealthy. Why everyone, including the rich, benefit in an economy when wealthy people and corporations are taxed at a higher percentage rate than the rest of us.

   First, a very brief word on where we are. When President Bush came into office in 2001, we had an historic budget surplus. Not all of that was due to President Clinton’s policies, though he would probably say it was. But for what ever reason, we had a huge surplus. When George Bush left office, we had a huge deficit. As much as the Rep/Fox/pundits would love to make you believe it is so, the collapse of the historic surplus is not because of Barak Obama who came into office after the rise of the deficit.
The three biggest causes of the huge deficit were these:

1. President Bush fought two wars without any plans for paying for them. The cost of the Iraq war alone is in the neighborhood of one trillion dollars and counting. By the end of the next decade, with hundreds of billions of dollars being paid out in disability payments to soldiers, it will probably top off at three trillion dollars.
2. He cut taxes three times (2001, 2, and 8) in the middle of those wars for a total of about two trillion dollars without any plans to pay for them (actually, he claimed that the wealthy would have more to invest and that eventually it would help everyone, but that didn’t happen),
3. He passed a major drug plan without any plans for paying for it.
4. In 2008, for reasons that were not totally his fault, we fell into a deep recession and suddenly tax revenue dried up. The federal out-go increased with things like unemployment and food stamps, and its income went down with literally millions of people losing their jobs.   

Again, in spite of what Mitch McConnell, John Boenher and the Rep/Fox/pundit chorus, all of these things happened before Barak Obama came into office. There also were, at the end of Bush's term and the beginning of Obama's, a large bank bailout and a stimulus package, but even taken together these never came close to the magnitude of the cuts in income and increases in spending of the Bush era.   


   So, that’s where we are. In his first months in office, Barak Obama put together a bi-partisan stimulus package that was basically in three parts.

1. One part “shovel-ready” payouts that are still being paid out,
2. One part tax cuts which are notoriously ineffective for stimulus but designed to win over Republicans to vote for it (and that worked out well, didn’t it),
3. And one part to take up the slack in states that had to cut spending because of their ill-advised balanced budget requirements.

   The “Stimulus” did help, but not overwhelmingly, and because of that it unfortunately allowed the Rep/Fox/pundits to claim dishonestly that it not only did not help but actually caused harm (harm? Yes, that’s what they said).

   So, here’s why increasing the taxes on the wealthy makes sense, and it’s really not all that complicated. Let’s call it the Henry Ford Theory of Tax increases because he was an early proponent of the theory. Ford, as you may recall was a leader in paying his workers a decent wage because he had so many of them that if they were poor and couldn't buy his cars, he would feel it. It would keep down his car sales. So, he paid them living wages so that they could purchase his product and help him grow rich. Pay your workers more so that they can buy your stuff and everybody gets happy.

   When applied to taxes, the idea is that wealthy individuals and corporations make things and they want to sell them because they want to make a profit. (In today’s economy they often make them in Mexico or China, but they still want someone to buy them.) If the people on the very bottom of the society are kept dirt poor all the time, it keeps them from buying the stuff that the rich produce or invest in. If you keep the minimum wage low, and keep their incomes low, it may be easier for you to hire them to clean your house for a song, but it also makes it harder for them to buy your refrigerators, microwaves and autos. So, to help this situation and to help people in the long run, the government has to spread some of that wealth down to the bottom so that the people there can have a (slightly) higher standard of living and thus buy the products made or invested in by the wealthy.

   Ways to do that include earned income tax credits (a Reagan idea, by the way, but opposed as too liberal today by Republicans), or extended unemployment insurance, or just lower taxes. Ironically, tax cuts for the poor and middle class usually have much more bang for the buck in terms of stimulus in a recession than do tax cuts for the wealthy. The reason is that the wealthy don’t see and feel their tax cuts and they seldom change their consumption patterns with it. But the poor use their tax cuts to buy groceries, or make car payments. They push their new money out the door fast and it benefits the economy more quickly.

   So, by taxing the rich and giving it to the poor in an old fashioned “FDR” way (because FDR did this), the rich eventually---five or six years down the pike---will get the money back again because the poor are now able to buy things, lift the economy, and that generates more income for the rich. In the long run everyone benefits and the rich don’t have to be stuck with looking like bad guys for not wanting to share with the poor. It’s a logical way to help the economy, easy to see, easy to understand, but one that is never even acknowledged to be on the planet by the Rep/Fox/pundit voting block.

The Mexican Truckers' Dispute--a Backgrounder

You have probably read something (or more than something) already about the ongoing dispute between the US and Mexico over our broken promises to lift a ban on Mexican trucks coming into this country. Recently there has been one more lawsuit filed by Mexico against the U.S. over it. Here is a bit of background about the dispute that can put the issue in context.

The dispute actually goes back to 1982 when the U.S. Congress passed a law banning the entry of foreign trucks. Actually the official language was that foreign trucks would not be allowed to operate within the U.S., which effectively meant a block at all of the borders to their entry. The stated reason was that foreign trucks were not as clean or safe as our trucks. The unstated reason was that our truckers wanted in on the business. Eventually Canada lobbied and got the ban lifted from their trucks, leaving Mexico to be the only dirty, unsafe country on the list. For the next thirty years, no matter what Mexico might do to clean up its trucks or professionalize its drivers, the ban stuck. Eventually having little to do with the first reason and a lot to do with the second.

What they have to do is, when a Mexican truck full of, say, corn or televisions or cars, comes to the border, it has to stop, be emptied out, reloaded on a U.S. truck with a U.S. driver and off it goes. It is a lengthy, expensive way to do business. For Mexican trucking companies, the difference in costs between the Mexican drivers they hire on their side of the border and the U.S. drivers they have to hire on our side is significant and Mexico has been complaining about it from the start. In the suit filed this year they note that it adds an additional U.S. $2 billion each year to their costs.

In the late 1980s and early 1990s, when NAFTA was being negotiated, Mexico insisted that a cancellation of the trucking ban be written into the treaty. The U.S. reluctantly agreed and in 1994, when it came to operation, the the U.S. promised to phase out the ban.

Except that the very next year, 1995, the U.S. Congress passed another law extending the ban on Mexican trucks indefinitely.

Later that same year the Mexican government sued the U.S. under NAFTA’s Chapter 20 party-to-party dispute resolution mechanism. They won the dispute, but the U.S. politely did not comply.

In 2001, the NAFTA dispute tribunal unanimously found against the U.S. again saying that, the ban violated NAFTA’s provisions on national treatment and most favored nation obligations. The U.S. then lifted a ban a bit, but only on Mexican citizens owning American trucking companies, which did not really get at the heart of the dispute, because Mexican-owned companies were still not granted the necessary permits to operate in the U.S.

Following that, the Mexican trucking federation, CANACAR began what turned out to be years of negotiations with people in the Bush Administration to get them to obey the law. The administration argued that even if the federation could win over members of the Bush Whitehouse, Congress would never vote to obey the provisions of the treaty or the tribunal’s ruling. What they offered to do instead was to set up a pilot program in 2007 which would allow certain inscribed Mexican trucking companies to operate in the United States.

Yet even then, with a Democratic majority in both houses, the U.S. Congress refused to fund the project. And when President Obama’s budget was unveiled this year, money for the limited pilot project was not in it. In April, the trucking federation responded by once again filing Chapter 11 arbitration suit against the U.S., claiming this time that the U.S. was violating its NAFTA commitments by blocking the entry of Mexican trucks.

Although there are no damages demanded in the arbitration suit, as I noted above, the suit does mention that presently it costs the Mexican trucking companies over US $2 billion each year for the higher priced U.S. truckers and trucks. So, however it will be resolved (if ever) it will be worth a significant fortune to one side or the other of the border.