Saturday, October 22, 2011

Is Wall Street the Problem?

I don't want to sound like a political crazy person, but we are in deep trouble as a society. Just on the economic level, we are facing massive debt that includes unfunded liabilities in the trillions of dollars, and worse, we lack the political will to do anything significant about it. The rhetoric surrounding the growing income disparity in our society is a case in point. According to many, it is the result of a vast conspiracy on the part of the wealthy 1% of our society to accumulate all the wealth and leave the rest of us destitute. For example, Barbara Ehrenreich wrote in The Progressive, "They (the rich) have systematically hollowed out the space around them: destroying the individual working class with the outsourcing and plant closings of the 80's, turning on white collar managers in the downsizing wave of the 90's, clearing large swathes of the middle class with the credit schemes of the 00's-trick mortgages and til-death-do-us-part student loans."

Don't get me wrong, there is a growing gap between rich and poor in our society, and the middle class is losing ground, but it is not a vast conspiracy of the super rich to take all our money. The problem with these types of populist fantasies is that they mis-diagnose the problem with the result that we apply the wrong solutions that not only don't solve the problem, they in many cases, make it worse.

In the context of the challenges we face, and in particular, the need for deficit reduction, the Occupy Wall Street controversy is a massive distraction. In terms of the long term needs of our society, income disparity is way down the list of things we need to change. Some would argue that OWS is dealing with the deficit problem because it wants to increase the taxes the wealthy pay and thus reduce the gap in income between rich and poor while also reducing the budget deficit.

The problem with this option is that it doesn't actually solve the central problem. We are borrowing 40% of what our government presently spends, thus we are dramatically increasing our deficit with every passing day. We are increasing our deficit by 1.4 trillion dollars this year alone. Trying to bring the rich down a notch by reducing the amount of their earned income, will not even begin to address the problem we face.

In addition, this recession has hurt everyone, rich included. Veronique de Rugy, an economist at George Mason University, gleaned from IRS statistics that there were 392,220 people in America who earned over one million dollars in 2007 (pre-recession) and they paid 27.8% of all U.S. income taxes (they were 0.1% of the population). By 2009 (height of the recession) there were 233,435 people who earned over one million dollars. That is a 40% decrease in the number of people who would be considered the "super-rich" Worse, and because their numbers were reduced, they only paid 20.3% of the nation's income taxes. In other words, a great deal of the rhetoric associated with OWS does not reflect the reality of our economic crisis. And, a 40% decrease in the number of millionaires implies that the recession has done a pretty good job, all by itself, in bringing the rich down a notch or two.

Further, this reduction in the number of people in the highest income brackets is a consequence of the shrinking and continued stagnation of our economy. If we do not figure out how to get our economy growing again, we can only expect that there will be fewer ultra-wealthy for us to raise taxes on, and our problems will only get worse. They will get worse because we have one of the most progressive tax policies in the world. The upper-middle class (those earning 10% of the nation's income) pay 70% of all income taxes. The lower-middle class and below) either pay no income taxes (47% of American income earners pay no income taxes) and for many of the working poor, with tax credits they receive unearned income from the federal government amounting to a negative income tax.

We need to get brutally honest with ourselves. We cannot continue to operate our government on borrowed money, especially since we have reduced our tax base to 53% of earners. In addition, we cannot put the burden of the majority of government funding on only 10% of the population. We will end up creating one of the situations that produced the economic crisis in Greece; tax avoidance. To be honest, it is already going on here. Many small businesses and individuals are practicing different tax avoidance methods such as barter and cash only transactions. For the super-wealthy and corporations, tax avoidance is easy. They just off-shore the money, they put the money in tax shelters, or they find clever ways to avoid having to declare the income as income. It is this capacity for tax avoidance that accounts for the fact that even when the highest income tax bracket exceeded 70% of declared income, the government never took in more than 19% of annual GDP in taxes. This 19% of GDP is the historic norm for annual income tax revenue in the U.S. for the last 50 years. We are fooling ourselves if we think we can tax the rich to reduce our deficits and solve our economic problems, including the problem of increasing income inequality.

We must deal with the long-term liabilities we face as a nation. We are not far away from the day when all of our tax revenues will go to pensions and health care for retirees particularly on the local level. When Bob Frum, as partisan a Democrat as I know of, cautions his party to not be overly excited about the overturn of the law in Ohio to end public sector union bargaining rights because the problem of unfunded public pension funds still exists, and the most egregious examples of pension abuse arise with the groups garnering the most sympathy, the public safety workers (police, fire fighters, and prison guards). In other words, the day of reckoning will soon be upon us and the party that has ignored and even worsened the problem will face the ire of the voting public (as they should).

The long-term liability problem is the main reason why we are borrowing 40 cents of every dollar we spend in government. Our first priority must be to reduce and eventually eliminate our deficit spending, and there is only one realistic way to do that. We must reduce overall government spending. Even in the best of economic times, even with the highest conceivable tax rates (income, capital gains, & inheritance taxes), we have never received more than 20% of our GDP in tax revenues. Logic tells us, that the only realistic answer to the deficit problem is to bring federal spending in line with federal tax revenues. Since we only take in an historic average of 19% of GDP in revenue, we must design our government programs so we only spend 19% of GDP to sustain them (We are presently spending 24% of GDP while the recession has dramatically reduced tax revenues to 15% of GDP).

The counter argument is always that we need to spend this much and more to care for the poor and the elderly, to improve our infrastructure, to invest in green technology, and to create a public health care system that is comparable to the other nations in the developed world. The conservative response cannot be that we don't need to do those things, but that we need to do them in such a way they actually achieve the goal, and are affordable and sustainable.

Many of the problems we face are deep and systemic, and have little to do with the amount of money we spend on them. Take my pet peeve, education in America. We spend more per capita on education than almost any society on earth, yet we are well down the list in the rankings of educational results. We are spending obscene amounts of money for a system of public schools that are failing our children. Worse, we have been aware of this problem for several decades and nothing gets fixed. For example, the solution of the 90's and into the 00's was accountability and measurable results - thus No Child Left Behind and standardized test scores for grade levels. The results have been less than helpful. We must acknowledge that these problems don't lend themselves to bureaucratic solutions, and so, we are wasting vast amounts of money to maintain an ineffective educational bureaucracy. It should not surprise us to hear large numbers of Americans calling for the abolition of the Department of Education.

Many of us on the conservative side of the ledger see reducing government spending as a no-brainer. The standard argument of the other side is to emphasize all the well intentioned purposes of government programs, not only to justify the continued investment but to prevent any and all reductions. The question will only finally be resolved, when all of us, liberal and conservative, come to see the perils we face, and arrive at some level of agreement as to the sacrifices we will need to make to escape them. In many ways, this recession is a foretaste of the time when we all must face up to the consequences of our reckless economic policies. We speak of kicking the can down the road, there will come a day when we no longer face a can, but the edge of a cliff.