Info and Perspective on the Budget Crisis

So much is happening under the guise of “the budget crisis” that I thought it might be useful to deconstruct this issue a bit.

I am concerned, in particular, because a number of efforts are emerging to formally engage the public in deliberations about this issue and because social, political and economic forces exist to bias those deliberations, often without the organizers even being very aware of it.

It is hard to fairly cover all the ground on government budgets, partly because of their complexity and the incredible impact they have on so many dimensions of life and partly because any gigantic concentration of wealth will attract powerful distorting interests. I see some giant realities and possibilities that are frequently overlooked or sidelined — intentionally or not — in the way this issue is framed for deliberation. So I have tried here to outline some of the major factors I see, for the information of anyone thinking about the issue or designing public deliberations on it. I’ve included extensive links with tremendously important information on them.

I hope it is useful to you.

Coheartedly,
Tom

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PART A: PRIMARY SOURCES OF THE BUDGET CRISIS

Clinton completed his term in office with a balanced budget — no budget deficit. George W. Bush’s policies changed that, creating very large deficits. Under Obama, Federal deficits have grown even larger — some for real, and some because of accounting changes. Economists have analyzed these changes (see links below) and a number of conclusions point to obvious causes and solutions.

1. THE CURRENT ECONOMIC RECESSION

Recession contributes to government deficits at all levels by putting people out of jobs and reducing their incomes. When working people aren’t employed or are underemployed, they pay less income taxes (as well as less sales taxes and many other taxes). They also apply for more government safety-net services like food stamps. And so, since unemployment reduces tax revenues and increases public service expenses, it increases government deficits.

In recent years this dynamic added nearly $60 billion to the Federal deficit for each 1% of unemployment over 4% (see http://iea-macro-economics.org/unemp_deficit.html). So 9% unemployment generates — and will continue to generate — a $300 billion dollar federal deficit. Programs that create jobs — like federally funded infrastructure development programs — tend ultimately to reduce the deficit.

Many economists view job-creation programs as an investment rather than an expense, because as more people become employed, they pay the government more income taxes and demand fewer government services. These “Keynesians” advocate increasing the deficit now so it will decrease later. It is a way of “managing the economy” to keep unemployment low. (Other economists focus on lowering interest rates and/or increasing the money supply, which encourages corporations and consumers to buy more, which leads to more people getting hired to meet the rising demand for goods and services. Lowering interest rates can help, but offers limited leverage if interest rates are already really low, as in the current recession. Lowering interest rates can also increase the level of private debt, since it encourages more borrowing.)

2. TAX CUTS FOR THE WEALTHY

Certain taxes tend to be paid mostly by wealthy people — taxes, for example, on capital gains, inherited wealth, interest from investments, and other non-labor income. Furthermore, regular income tax rates for wealthy people tend to be greater than those for middle class and poorer people. When these tax rates are cut, the government gets less money. To make matters worse, many giant, highly profitable corporations (e.g., CitiGroup, Exxon, BofA, etc.) pay no taxes at all. Low tax revenues naturally contribute very directly to budget deficits.

Taxes on the top income brackets are today much lower than they have been in the past. For the last 18 years individuals in the top income tax bracket (those making more than $250,000 to $379,150, depending on the year) have been paying 30-40% of their income in Federal taxes. Compare that with 1945-1963 when those in the highest tax bracket (people making over $200,000) paid 91-94% of their income in taxes. (See ) Additionally, statistics clearly show that those in the highest income brackets benefited financially during the last decade while the vast majority of Americans lost ground. (See, for example, )

The budget deficit could be significantly reduced if we returned to an average historical tax rate like 1965-1982 when the top rate was 70% for incomes over $100,000 (perhaps with somewhat higher rates for the super-wealthy, such as those earning more than ten million dollars). A major effort to close both individual and corporate tax loopholes (which the wealthy are especially equipped to take advantage of with hired lawyers and accountants) would also help.

An approach with special benefits to society would be economist James K. Galbraith’s suggestion of higher estate, economic rent, and long-term capital gains taxes — with a high level of exemption and a one-hundred percent deduction for qualified philanthropic contributions. (See http://www.angrybearblog.com/2011/03/sensible-tax-reform.html)

3. FINANCIAL CRISIS

The recent financial crisis was caused by deregulation of the financial industry. In addition to its recessionary impact on the economy as a whole (see 1 above) the crisis added to the deficit when the Federal Government bailed out giant Wall Street firms, many of whom had participated in lobbying for the deregulation and playing the risky financial games that created the crisis in the first place. Not only did this vast expense add to the deficit (although much of it is being paid back), but the consequent recession collapsed the tax base for Federal, State, and local governments (as described in 1, above).

Stronger regulation of the financial industry — and even strong legal action against the worst offenders — would not reduce the budget deficit, but it would help avoid serious future economic crises that would increase the deficit. Some critics note that the government could have done more to bail out Main Street homeowners and workers — as well as or instead of Wall Street bankers and financial corporations — which would have raised tax revenues, as in 1, above, and reduced the deficit.

4. EXORBITANT MILITARY EXPENDITURES

The United States spends more on its military than the next 15 largest national military budgets combined — and most of those big militaries belong to U.S. allies, not potential enemies. Furthermore, the wars in Afghanistan and Iraq were and are based largely on lies, ideology, and vested economic interests rather than sane strategic judgment and true defense of America. Most Americans do not realize that the gargantuan funding of these two wars was kept out of the official budget until Obama took over. When he started accounting for these previously hidden expenses within the official budget, it made the visible deficit increase much more than if those expenses had been kept hidden. In addition, many other military-related expenses are hidden away in seemingly non-military parts of the published budget (e.g., nuclear weapons are under the Department of Energy), making it hard for the public to see how much we are actually spending for what. On top of that, waste and fraud in the military are endemic and legendary, with hundre
d
s of billions of dollars not even accounted for.

The obvious solution is to institute full and honest accounting of military expenses as military expenses, and then to reduce them on ways that actually support our national security.

Evidence for the above:

Bush deficit and its causes – compared to Clinton’s (which finally balanced) – data up to 2009
http://critterscrap.blogspot.com/2010/06/bush-deficit.html

The impact of the recent bailout and economic crash on the deficit — including future projections
(Civilized Conversation blog)

Where the deficit comes from – chart
http://wapo.st/DeficitCharts (Washington Post)

Budget deficit chart, inflation adjusted (as percent of potential GDP) + explanation of the consequences of recession
http://cboblog.cbo.gov/?p=298 (Congressional Budget Office)

Budget deficit as percent of GDP: the current budget is not highest-ever
(Mark J. Perry blog)

History of top U.S. tax bracket rates
(Tom Atlee’s Posterous)
(Visualizing Economics / New York Times)

Who should pay for the financial collapse?
http://tinyurl.com/4h26gbk (Rachel Maddow / Naomi Klein in Forbes)

Corporations that pay little or no taxes (or which get tax rebates)
http://payupnow.org

Military fraud and faulty accounting
(CBS News: Pentagon can’t account for $2.3 Trillion)

PART B: RATIONAL APPROACHES TO THE BUDGET CRISIS

Although these approaches should not be biased for in deliberative framings, any framing that excludes or marginalizes them IS ITSELF biased.

1. Get clear on how much proposed cuts would actually impact the Federal deficit and debt. Many of the cuts currently being most vehemently advocated would do little if anything to impact the deficit. These cuts are, at best, “penny wise and pound foolish” and, at worst, ideological straw men, designed to distract the public while enhancing special interests in ways that degrade “the general welfare” that the U.S. Constitution says government exists to promote.

2. Decide what policy we want regarding unemployment. This is a major decision about what kind of society we want. Liberals tend to say the government should support people who lose their jobs. Conservatives say it is too expensive and reduces people’s motivation to work. Clinton’s “workfare” program combined these two, supporting unemployed people for a limited time while they looked for work. If we focus just on the deficit, we find that, while unemployment generates significant deficits in the short term, getting people employed again pays off those deficits in the longer term. From this perspective, an obvious — if somewhat counter-intuitive — approach is for the government to fund major public benefit programs — like infrastructure improvement — for which people can be hired, as well as various tax incentives for companies to hire people and everyone to buy more.

3. If we are focusing on cuts, there are two places in the Federal budget where we could cut expenses with little loss of public benefit: (a) military expenses and (b) waste and fraud in all budget sectors, especially military and health care.

4. Increase taxes on corporations and the hyper-rich. It is one thing for wealth to be used for necessities, luxuries, and charity. It is quite another when it enables undue social power, monopoly market domination, casino capitalism and control of the infrastructure and processes of democracy itself. These latter forms of wealth, if not balanced with the general welfare, parasitize and ultimately destroy society, economically and politically. Progressive taxes not only fund the government, but ease extreme imbalances that can tear a society apart.

5. Reduce income taxes — especially on middle and lower incomes to encourage spending — while increasing or establishing taxes on socially and environmentally damaging activities — e.g., CO2 and toxic emissions, unsustainable resource extraction, financially speculative investment games that do not support production (e.g. hedge funds), moving factories overseas, etc. This will help “internalize” the social and environmental costs of economic activity into the prices of goods and services so that market forces — that is, consumers and companies acting out of self-interest, including looking for low prices and good investment opportunities — will favor socially and environmentally beneficial products and services and handicap harmful ones.

6. Only subsidize industries or companies that actually create jobs (i.e., tax breaks should be given only for actual jobs created, not for the possibility of jobs created), or that are launching innovations that increase America’s actual security and sustainability but need support to become competitive in economic systems that tend to make it harder for socially/environmentally responsible businesses to succeed. From a purely fiscal perspective, a strong argument for this is that innovative public benefit corporations will ultimately decrease the amount of money the government has to spend paying for externalized costs (like cleaning up toxic waste dumps or treating cancers) and dealing with industry-caused crises and maintaining out-dated dysfunctional systems.

7. Leave Social Security alone. It doesn’t belong to the government or in the Federal budget. It is properly considered a separate retirement account or insurance program for citizens that is held in trust for them by the Federal government. To spend it on other things or even borrow from it is a violation of that public trust and should be recognized as destroying Social Security. And all the talk about how it is going to go bankrupt ignores the fact that the condition of the Social Security trust fund is intimately connected to the level of employment. If the government has policies that support a reasonable level of employment (e.g., only 4.5% unemployment), the Social Security trust fund will be healthy far into the future. In fact there’s even a proposal for the Federal Government to tap the Social Security trust fund to pay for job-creating programs and then, when Federal tax receipts go up, the Feds pay back the Social Security fund. (See http://iea-macro-economics.org/ss_unemp_correlations.html)

8. Reconceptualize social goods like security, health care, justice, education, economics, citizenship, etc., so that societal and governmental functions that have those names actually serve the phenomena those words describe and vastly reduce the costs of centralized government. This is a seldom-discussed and very transformational alternative to both budget cuts and tax increases — an approach that could complement both of the other two approaches. Here are a few examples to show what I mean:

* EXAMPLES of reconceptualizing HEALTH CARE to support people’s physical health:
Support human well-being rather than focusing on “a war on disease” and keeping people alive no matter what. Focus on such innovative approaches as:
a. prevention and education
b. support for already widely-used complementary/alternative medicine
c. limits on expensive technologies and drugs
d. full funding of care rather than fee-for-service
e
. reduction of environmental toxins, dangers, poverty, and other sources of disease, debilitation, disability, and death
f. use of the placebo effect as a healing force rather than a problem
g. support for individual choice around conscious dying (perhaps even allowing patients to rechannel insurance funds from preventing their own death to supporting charities or other social benefit activities)

* EXAMPLE of reconceptualizing NATIONAL SECURITY to mean national safety and future well-being
Focus on government policies that support economic health; community resilience and self-reliance; crisis preparedness; environmental sustainability and local renewable energy; safe neighborhoods; and a healthy, educated, and competent population. These would give us more security than expensive wars of occupation in terrorist homelands that kill and maim people on both sides, creating disabled veterans and more enemies, combined with invasive, porous security measures in airports.

* EXAMPLE of reconceptualizing EDUCATION to mean actual learning:
Use modular computerized lessons and exercises to maximize individualized learning and increase peer mentoring and direct teacher-student interaction, despite class size; aim for mastery rather than test scores and grades. See the Khan Academy http://www.khanacademy.org/

* EXAMPLES of reconceptualizing JUSTICE to mean fairness and healing the harms people do to each other
a. Criminalize actual social harms — like causing financial collapse — while decriminalizing drug activities that would cause minimal social harm if they were legal, such as possession of marijuana
b. Expand the use of rehabilitation, education, community involvement and restorative justice in place of abusive, expensive imprisonment

* EXAMPLE of reconceptualizing ECONOMICS to mean managing goods and services to benefit people
Move beyond monitoring and rewarding the flow of money (GDP and financial profit) and the production and consumption of more and more stuff (material economic growth) to measuring and rewarding how well economic activity actually benefits people, society’s well-being, and nature’s ability to continue supporting us. For example:
a. Does wealth bring happiness?
http://www.brianhayes.com/2007/04/ (shows downward trend of happiness, while income rises)
b. Economics of happiness video
http://www.theeconomicsofhappiness.org/
c. New Quality of Life Indicators
http://rprogress.org

* EXAMPLE of reconceptualizing CITIZENSHIP to mean creating wise public policy and social benefit initiatives, rather than simply individual votes and collective political battles
Empower citizen deliberative councils to develop and implement wise solutions to public issues and problems. See http://co-intelligence.org/CDCUsesAndPotency.html

PART C: IMPORTANT LINKS

** Many citizens are responding at a level of generalized ideology and political spin rather than considering the likely on-the-ground impact of proposed budget cuts. There are, of course, trade-offs in every budget decision. The point is to take seriously the trade-offs and figure out collectively what kind of government and country we really want. These links describe the consequences of budget cuts relating to “the general welfare”.
http://pol.moveon.org/soundthealarm/?rc=tw
http://www.nytimes.com/2011/02/20/opinion/20herbert.html
http://www.usuncut.org/ (see “About” section)

** To clarify our values, we could consider the relative impact of selected tax breaks vs comparable budget cuts.
(American Progress)

** We need to realize that the REAL Military/National Security budget is much bigger than most pie charts suggest. This is accomplished with various accounting tricks like putting military expenses in other budget categories (like nuclear weapons in the Dept. of Energy), keeping the Afghan and Iraq war expenses out of the budget during the entire Bush administration, and including Social Security in the budget even though it is a trust fund. (How would you feel if I was holding money for you and I included it in my “budget” and called it an “entitlement” of yours that I could tap to balance my own budget?). The military is also a major source of waste and fraud which, unsurprisingly, is extremely difficult to address.
http://www.alternet.org/world/150086
http://www.warresisters.org/pages/piechart.htm
(Mother Jones)
http://www.lewrockwell.com/sardi/sardi59.html
http://csis.org/publication/resourcing-defeat-0 (esp Iraq/Iran budget)
(CBS News: Pentagon can’t account for $2.3 Trillion)

** Some proposed “budget balancing” initiatives impact our ability to do democracy – eliminating or slashing Federal funding for NPR and PBS, AmeriCorps, civic and history education programs, public financing of Presidential elections, regulation of net neutrality, election reform, and immigrant civic integration. Locally we find this democracy-degrading “budget balancing” in cutting education funding, allowing state-appointed “emergency managers” to fire local elected officials and corporations to take over local governments, reducing the power of unions without reducing the power of corporations, and eliminating or delaying primary elections (while at the same time proposing expensive voter ID systems and dubious electronic voting machines).
http://huff.to/igBJRl (re Fed budget)
http://www.theittlist.com/site/ittlist/ind/5937/ (re State initiatives)
http://apne.ws/eBWbC0 (AP News re primaries)
(StrongerDemocracy re voterID)

** There is no shortage of wealth to deal with public debt and public services; it is just concentrated in fewer and fewer private hands. There is far more wealth in the upper .1% of the population than most Americans realize. Even a small part of that could pay for most of the budget deficit. The uber-rich and giant corporations pay less income tax now than during most of U.S. history. As their taxes have gone down, the deficit has gone up. This massive excess wealth provides its owners with enough money to control media to spin the news and commentary and to buy politicians to keep their taxes low and their government-mandated perks and profits high.
http://bit.ly/g2G4C4 (Mother Jones) – excellent charts and graphs
http://www.commondreams.org/view/2010/11/14-1 (attack on middle class)
http://bit.ly/h7G0MU (Forbes on billionaires)
http://www.commondreams.org/view/2011/03/07-5 (America is not broke)
http://visualizingeconomics.com/posters/ (Income distribution)
http://www.slate.com/id/2266174/ (The Great Divergence charts)
http://www.lcurve.org/ (Visualizing income differences: actual scale)

** There are ideas for alternatives to taxing income
http://bit.ly/h7D88A (MoneyCrashers.com)
http://www.angrybearblog.com/2011/03/sensible-tax-reform.html
http://en.wikipedia.org/wiki/Georgism (land tax)