Economic Policy

The following is taken from from

Patriotism, Democracy and Common Sense

(Click here to access the full text of the book)

FAILURES

Just as American foreign policy seeks to preemptively impose the American estab­lishment's will on other, poorer countries, so American economic policy is based on class warfare instigated by the rich and ruling class in the United States against the middle class, the working class, and the poor.

As a result, excluding the rich, most Americans are worse off economically to­day than in 2001. Middle-class baby boomers, who are just beginning to retire, can expect their economic position to further deteriorate. The radical right's long-term objective is to continue tax cuts for the rich and massively increase military spend­ing. This will increase the national debt still more and result in greatly diminished education, employment, and health care investments for the middle class, working class, and poor.

But will the middle class make the sacrifices that conservatives expect of them and their children? The middle class rebelled in the case of Vietnam. The need to reverse course today is all the greater because the United States cannot continue in its role as international debtor, with competitors like the dictatorship in communist China holding large portions of our international debt.

We Are Worse Off. As with foreign policy and national security policy, when we ask whether America is better off today economically than in 2001, the answer to the average American is a decisive no.

Since 2001, the official unemployment rate is higher. But even this higher rate is misleadingly low. As Austan Goolsbee, professor of economics at the University of Chicago Graduate School of Business, has warned, the government in recent years has been "cooking the books" on unemployment. The unemployment rate has been underreported because persons on Social Security disability programs have not been counted as unemployed. If they had been counted, as they had been previously, the unemployment rate would be significantly higher.

In addition, underemployment and middle-class job insecurity are extensive, there are fewer payroll jobs, outsourcing of manufacturing and high-tech jobs to workers in other countries has increased, the rich have gotten richer because of the massive tax cuts given to them, a huge budget surplus has been squandered into a deficit of over $500 billion, and the poverty rate has increased. Child poverty rates are higher in America than in most industrialized countries. Income and wealth in­equality remain enormous in America. In 2002, the average pay of chief executive officers in corporations was about 176 times the average pay of workers. Based on New York Times accounts, in terms of income and wealth, the United States is the most unequal industrialized country in the world and is growing more unequal faster than any other industrialized country.

The Tax Cuts Are Squeezing Seniors and the Middle Class. The easiest way to frame present American economic policy is by looking at the budget implications of the recent tax cuts of well over $1 trillion, which went disproportionately to the rich.

In chapter 23,Jamie Galbraith makes clear that the beneficiaries of these tax cuts include oil firms, defense contractors, Iraq war profiteers, pharmaceutical com­panies, mining interests, and big media. These are economic interests whose basic position is maintained by government contracts, rights to natural resources, monop­olies, patents, and government-granted protections. Their profits do not depend heavily on strong consumer demand or full employment. Full employment would it­self bring other forms of political difficulty for conservatives, like stronger labor unions, pressure for higher wages, higher charitable contributions, and a stronger nonprofit sector.

Especially when considered alongside massive increases in military spending, the recent tax cuts, if continued and made permanent, will take a large toll on the federal budget and affect an array of investments and services important to the mid­dle class, the working class, and the poor.

Where are we heading? Look at Social Security and Medicare. Baby boomers are people born between 1946 and 1964. When this huge baby-boom generation retires soon, costs will go up for Social Security and Medicare. From 2000 to 2030, Social Se­curity and Medicare costs will increase by more than 5 percent of the size of the United States economy. This increase is larger than the United States defense budget.

So there will be more elderly people, and while there will inevitably be some changes in Social Security and Medicare, costs for these programs are going to rise substantially. At the same time, the nation has a variety of serious unmet needs: over 44 million people without health insurance; skyrocketing college tuition^; declines in college scholarships; more and more rich students edging out middle-class, working-class and poor students for slots in the best colleges; decrepit schools for working-class families and the poor; and decaying public infrastructure at a time when September 11 demands world-class public infrastructure.

How are we going to address these unmet needs and still meet the needs of a growing elderly population in future decades? A logical answer would be to raise more revenue, because we will have more expenditures with the aging of the population. Instead, the American government is reducing taxes on the rich.

In chapter 22, Robert Greenstein concludes that, if and when the 2001 tax cut is fully in effect, its annual cost will equal: more than three times everything the fed­eral government spends on education at the elementary-, secondary-, and higher-education levels combined; or five times everything the federal government spends on housing and urban development; or twenty-four times the entire Environmental Protection Agency budget. If the tax cut is made permanent, the cost of just the por­tion of the tax cut going to the top 1 percent of the population will be as large as what the federal government spends on education at all levels.

The Tax Cuts and Increasing Debt Are Part of the Right's Long-Term Ideology. As articulated by Robert Greenstein, the massive tax cuts are part of a long-term agenda by the radical right in America to reduce public programs that benefit the middle class, working class, and poor. For example, a leading strategist of the radical right has argued for reducing by half the size of the domestic part of the federal government over future decades. As this ideology indicates, the tax cuts and the goal of shrinking the fed­eral government are being pursued as complementary long-terms strategies. Those pursuing these strategies are patient. They are willing to wait until 2010 to have the estate tax repealed. They are willing to take a long time to squeeze down the federal govern­ment, with the squeezing occurring gradually and incrementally but eventually reaching huge proportions.

In 1995, conservative Speaker of the House Newt Gingrich overreached and moved too fast. Today, the extreme right is not repeating that mistake. There is a clear understanding on the part of conservatives that, if one were to publish in the official federal budget today the kind of budget cuts that the recent federal tax cuts ulti­mately will entail, the tax cuts would have a considerably harder time being passed. So the deep budget cuts are not being published in the federal budget today alongside the tax cuts. This is part of the broader strategy to deceive and mislead the American people and an accommodating mainstream media—in economic policy as in foreign, na­tional security, and Middle East policy.

The radical right also is lobbying for still larger tax cuts for the rich. Some want to eliminate all taxes on capital gains, dividends, and other forms of income and move toward a "flat tax." The scheme is to allow deficits to continue to balloon un­til Wall Street demands larger and larger domestic spending cuts as a condition for holding down long-term interest rates.

The Middle Class and Their Children Don't Have the Financial or Moral Capital to Pursue AH Goals. We therefore must confront a fundamental question about what kind of society we want and, in particular, what the role of the federal government should be in helping to bring that society about.

In 1965, when America was ratcheting up its intervention in Vietnam, Presi­dent Johnson said we had enough resources for both "guns and butter." In response, the great American journalist Walter Lippman wrote a column in which he said that he didn't know whether we had enough financial capital for both, but he was sure we didn't have enough political and moral capital to fight a war in Vietnam and a war on poverty. He turned out to be absolutely right, as Jeff Faux discusses in chapter 21.

The early twenty-first century saw the war and post-war in Iraq diverting more and more money from domestic spending. So the additional economic problem is America's self-appointed burden of sustaining a continued role as the world's police, dedicated to repressing any movement, anywhere in the world, that appears to threaten the imperialism of American conservatives. This policy was set out in the American government's September 2002 National Security Strategy.

Many believe that the United States has neither the financial capital nor the moral capital to pursue such a strategy. Pursuing it would require a substantial sacri­fice by the American middle class, which already, for example, is seeing its offspring edged out more and more by rich kids at the nation s top universities. Substantial sac­rifice by the middle class is, of course, the political trigger, as it was in Vietnam. Sadly, we have long since learned that what you do to poor people has limited political consequences. However, in Jeff Faux's words, "When you start touching the security of the middle class in a sustained way, then there is trouble."

The Perilous International Position of the American Economy. At the same time, the American economy is in international trouble. We now have a $500 billion annual trade deficit. Under current conditions, if we were to return to full employment in the United States, the trade deficit would be much greater. We have lived decades in a condition of progressive decline in our ability to pay our way in the world through the sale of goods and services, a decline that has been offset for most of that period, and sensationally in the last years of the 1990s, by the willingness of the rest of the world to lend the differences to us, and to do so in dollars—that is to say, in a cur­rency whose issues we control. And therefore the debts were incurred by us on very favorable terms—terms not available, basically, to any other large debtor in the world.

In his chapter, Jamie Galbraith explains how this international monetary order has been in existence for about thirty years—quite a long time for any single inter­national monetary order to persist. The architecture of the present system is not sta­ble, for it depends entirely on the portfolio investment decisions of a small number of major players—notably Japan and communist China—as well as the herd mental­ity of powerful private speculators. The American media fail to sufficiently remind the public of our vulnerability.

The risk is that, without attending to the decay of our industrial system and the increasing disrepute of America as a world leader because of our policies in Afghanistan, Iraq, Palestine, and Israel, a great part of the international community may stop lending us back our dollars. And oil-rich Middle East countries may in­creasingly seek to expand their relationships with rising powers like China, which have a pressing need for oil from foreign sources.

SOLUTIONS

Following American public opinion in national polls, alternative economic policy needs to rescind the recent tax cuts for the rich and legislate demand-side tax cuts for the middle class, workers, and the truly disadvantaged—all of whom need a Fair Economic Deal. The Deal should provide average Americans economic security against the class warfare of the rich, just as they need physical security against ter­rorists and criminals. Tax cuts for average Americans should be complemented by increased federal support to students seeking postsecondary education and by demand-side investments in public infrastructure, national security, the reconstruc­tion of the inner city, and new high tech sectors, including alternative energy. As a result, millions of public and private sector jobs will be created. A federal revenue sharing program must stop the financial hemorrhaging of state and local govern­ment. The public sector must finance sound Social Security and Medicare systems, while a new National Medical Defense system should ensure that everyone has health insurance. To stabilize America's international financial position, we need to rethink our present commitment to the free-trade system.

What Do the People Say? In recent polls, 88 percent of Americans believed the budget deficit is a "serious" or "very serious" problem. Some 58 percent thought tax cuts should be targeted to middle-income and low-income people, and 40 percent more thought taxes should be distributed equally for all income brackets. That means 98 percent of the people disagreed with tax cuts going mostly to the wealthy. Some 67 percent of the American people in an ABC News- Washington Post poll preferred to have more spending on needs like education and health care, rather than on tax cuts for the rich. Three times as many Americans say they want to be in a labor union than are in a union. Some 64 percent said it is the federal government's re­sponsibility to make sure all Americans have health insurance. More than half said the government should create a plan to cover everyone, even if it requires a tax in­crease on them. Polls also have shown public opinion support for financially sound Social Security and Medicare systems and rejection of privatization.

Rescind Tax Cuts for the Rich. Following these priorities of average citizens in­stead of the agenda of the ruling class, alternative economic policy needs to rescind tax cuts for the rich and reduce taxes for the middle class, workers, and the poor.

Recession of tax cuts for the rich should be based on precedents from the 1980s, when many such tax cuts were rescinded after average Americans were fully informed of the negative impact on them. After rescission, the longer-run goal should be to reduce welfare for corporations, what Kevin Phillips in his foreword calls the "socialization of economic risk" for the ruling classes. With an eye to Thomas Jefferson's warning against the antidemocratic "aristocracy of our moneyed corporations," the United States needs to return corporate taxes to the levels in force during the Eisenhower administration. We also need to increase the top marginal tax rate for the super-rich to about 50 percent. This would still be far below the top marginal income tax rate of 91 percent during the Eisenhower administration.

Repealing the tax cuts given to the super-rich would return more than $85 bil­lion per year from the richest 5 percent of the population. Returning to corporate tax rates in force during the Eisenhower administration could increase tax revenues by roughly $110 billion more per year. Returning to a 50 percent top marginal in­come tax rate far below the top rate in the Eisenhower administration could capture as much as $90 billion more per year from the richest 2 percent of the population.

At the same time, we should provide tax cuts to the 150 million hard-working workers who are struggling because they can't afford to buy all they need. Million­aires don't need additional spending money. Workers, middle-class Americans, and the poor do. Their spending will stimulate the economy more effectively, help busi­nesses, and be more fair to the Americans who need fairness the most. There is am­ple economic evidence that putting money in the pockets of average Americans stimulates the economy much more than further lining the pockets of the rich.

Through these tax costs, the overall economic vision of America needs to re­turn to the demand side and to the robust, full-employment economy that charac­terized much of the 1990s. A demand-side policy should extend unemployment as­sistance to the jobless and raise the minimum wage. A living wage is a very important way to assure that lower-income American households have adequate resources. Likewise, the earned income tax credit is a proven, effective model for fighting poverty. It should be protected and expanded. We also need to reverse policies that have made it increasingly difficult for unions to organize in the private sector.

Economic Security: Protection from the Ruling Classes. But demand-side strategies are only part of alternative economic policies. Just as average citizens need physical security to protect them from terrorists and criminals, so they need economic secu­rity to protect them from the class warfare launched in America by the rich.

As Jeff Faux observes, it has become a cliche in America that workers must ad­just to being churned through many companies, none of which will provide a se­cure working life. As a result, most workers are in constant anxiety about their eco­nomic condition, as companies under pressure from brutally competitive markets abandon responsibility for health care, pensions, and job security.

In addition to unemployment, the American economy contains a great deal of underemployment among wage earners and middle-class citizens. Many wage-earning and middle-class families need two people working to make ends meet. To­day, there are almost five million Americans who are working part-time but who need full-time employment. Many are working in low-skilled, dead-end jobs. Many family providers have zero health coverage. The poor always have been worried about decent child care, affordable housing, and enough money to send their kids to college. But today most wage-earning and middle-class families have similar worries.

A Fair Economic Deal. To address the need for economic security, a Fair Eco­nomic Deal should be launched that serves a broad middle-class, working-class, and lower-class constituency. The constituency should recapture some of the national mood that existed after World War II, when Americans sought to build a more in­clusive, equitable society, one in which everyone had a fair chance of making it.

What story or message might update that post—World War II American feeling and build the new economic alliance for the twenty-first century? Here are some words around which to rally, building on the suggestions of Jeff Faux:

You, the average citizen, are not alone in your search for a safe niche in this I-win-you-lose world. The very rich have profited at the expense of the families of salaried and working people of America. It is not fair for the rich to get richer at the expense of the rest of us. Power has shifted so significantly toward those at the top of the income and wealth pyramid that the majority of Americans who are struggling must mobilize to force the rich and the elites back to the bargaining table. We must close the income, wage, and job gaps.

Americans deserve a higher quality of life. We must invest in the human capital of all of our citizens, so all can deal successfully with technological change and the global economy. The role of the federal government must be to make investments that serve the interests of the salaried and working classes, along with the poor.

The need for a Fair Economic Deal and complementary alternative policies must be better communicated to the American people in practical, commonsense ways. We need more efforts to "personalize" the impact on the daily lives of ordi­nary Americans of the type of policy choices discussed in this chapter and to bring to life the federal disinvestment that our citizens face if the nation does not change course.

Public Infrastructure Creation and Economic Klondikes. Historically, the public sec­tor has been pivotal for ensuring that economic growth benefits all, services are pro­vided to all who need them, and new jobs are created. Public-sector job stimulation is a countercyclical policy. But the public sector also is the generator of medium- and long-term seed capital that forges the direction the economy takes and creates mil­lions of jobs in the process.

Public infrastructure investment has shaped America's future. Early on, public in­vestment built canals and subsidized the railroads to settle the West. Government fi­nanced the first assembly lines. President Eisenhower began building the interstate highway system in the 1950s. Federal investments developed the jet engine, began the exploration of space, and helped develop silicon chips, the computer, and the Internet.

Each of these public sector investment programs created jobs and businesses in the short term. In the long run, they spun off technological advances that became what economist Robert Heilbroner calls economic "Klondikes"—massive veins of private investment opportunities that have been the building blocks of American prosperity.

Other nations have invested hundreds of billions in public-sector infrastructure over recent years, such as the high-speed rail systems in France and parallel invest­ments in Germany and Japan. Yet American public-sector infrastructure investment has declined precipitously under supply-side ideology, beginning in the 1980s under President Reagan. Today, the United States is the only major industrial society not expanding its public infrastructure.

On September 11 and thereafter, America has paid the price—through, for ex­ample, a woeful airport security system unprepared for biological, chemical, and nu­clear attacks. Here is a starting point for public investments that both create mean­ingful jobs for unemployed or underemployed Americans and address an urgent national need. A related public-sector, job-creating investment is development of a high-speed train system for the United States. A recent USA Today poll found that 47 percent of plane travelers thought flying the most stressful form of transport, but only 2 percent of train passengers found that travel was stressful. Yet our public rail system has been allowed to atrophy by our leaders.

Nowhere is public infrastructure more in need of repair and reinvestment than in America's cities and inner cities. A commitment to redevelop inner cities also rep­resents the best way to bridge the growing racial and digital divides. Schools are in massive need of repairs. We need computer-smart urban mass-transit systems. The National Housing Act of the 1930s, with its commitment to housing as a human right, has been abused by supply-siders. That policy failure can be reversed by new public investment to repair and build housing for the poor, with the work done by nonprofit community development corporations and YouthBuild USA, which can employ thousands.

To complement physical inner-city infrastructure development, the public sec­tor needs to invest in human capital. For example, as Carnegie Corporation reports have shown, a key to inner-city school reform is more and better-trained teachers, assisted by youth-development workers. Hundreds of thousands of additional, well-trained preschool and after-school professionals are needed.

Note, too, that it is difficult to outsource public infrastructure and public ser­vice jobs.

A federal seed-capital commitment to forge economic growth in new direc­tions should, as well, create new jobs in a continuously evolving host of high-tech sectors—including enhanced electronic digital imaging (needed by our intelligence agencies, as discussed above), ceramics, advanced composition sensors, photonics, ar­tificial intelligence, robotics (which the Japanese are using to help care for their large senior population), advanced computer-assisted manufacturing, biotechnology, and research and development to find cures for cancer, Parkinson's disease, AIDS, other serious diseases, and the common cold.

The politics of the Middle East could change significantly if the United States became serious about developing electric cars and sources of energy other than pe­troleum. Even the Pentagon has admitted the threats posed by global warming, and America is in desperate need of a real environmental protection program. With the aging of baby boomers, there is a pressing need for creative advances in institutional and in-home health care. Public seed capital and leadership would address these sig­nificant American dilemmas, while creating millions of meaningful jobs for the mid­dle class, working class, and the disadvantaged.

Federal seed capital job creation must be matched by a federal system of job training and human capital investment. It is an epic scandal that America has no such system. The media say nothing. As part of reform, federal aid to higher education must respond to rapidly rising college tuition costs. People who already have gradu­ated and have lost jobs need to be retrained for newly emerging opportunities.

Local Government, Social Security, Medicare, and National Medical Defense. The federal government needs to enact a program of revenue sharing, and perhaps also loan guarantees, to stop the current, destructive hemorrhaging of state and local pub­lic services. The hemorrhaging has been made worse by stealth conservative block grant schemes that place greater and greater burdens on localities. We must permit local governments to maintain their services and to avoid regressive tax increases. Reduced services and regressive tax increases both tend to undermine the function­ing of the economy as a whole.

The radical right wants eventual privatization of the cash flows associated with both Social Security and Medicare. The plan is a bit like the Cheshire cat, except that it's not smiling. Sometimes you can see it, and sometimes you can't, de­pending on whether it is politically expedient and when the next election will oc­cur. But it is essential that we stop movement toward privatization of Social Secu­rity and Medicare, on the merits of those two programs alone. Our elderly will continue to be with us, of course, and their numbers will continue to increase. So the only real issue here is whether we provide for them in a way that is fair to them.

Universal health coverage needs to be enacted as a human right. Some 44 million Americans don't have health insurance. But health insurance also must be framed as a response to September 11, as the best way to combat biological war­fare. After all, people without health insurance tend to delay trips to the doctor or the emergency room. Yet if we want to prevent an outbreak of smallpox, or any­thing worse, as a result of bioterrorism, we need people to get medical attention right away. Micah Sifry makes this observation in chapter 37. As it is, most hospi­tals in major American cities go on lockdown on any number of nights a week. They refuse all emergencies because they already are beyond capacity. That is a cri­sis that no one is talking about, but it could make a huge difference if we try to resolve it now.

Health reform, then, should be packaged not as "universal heath care" or "sin­gle payer." We should call it National Medical Defense. For short, we might call it "Star Wards," as Sifry suggests. A National Medical Defense system must crack down on drug prices and health maintenance organization administrative costs.

Stabilizing America's International Financial Position. To stabilize our interna­tional financial position, we need a new set of institutions that permit our exports to grow rapidly. That will mean giving up claims to international debt payments in much of Africa and Latin American countries like Argentina and Brazil.

We may even have to rethink our commitment to the free-trade system. If we realistically assess the cost, and if it turns out that we cannot find a way to reconcile a commitment to full employment, America may need to choose full employment over free trade, as a last resort. While other countries eagerly encourage American multinational corporations to relocate, they fiercely protect their own domestic in­dustries, primarily through the use of tariffs—taxes on imported goods—and through the strict regulation of imported labor. America should at least debate the merits of doing the same, especially when our policies help support dictatorships like communist China.

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