Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

12 December 2010

Tax Cuts for the Rich: A Disastrous Blunder

Coda: Is the President a Bleeding Heart?

It’s been nearly a week since “The Deal” now. There will be some low-level haggling. But tax cuts for the rich appear on their way to extension and probable permanence, especially if the President loses in two years.

What’s left of the progressive side of the Democratic party is recovering from shock. But it’s not just the left wingers. People like me had no illusions about the President: we recognized his centrist and domestic “peacemaker” credentials from the start. Compromise and “getting along” here at home were central themes of his 2004 keynote speech that put him on the road to the White House,

People who expected the President to act like the left-wing caricature that Boehner and McConnell painted of him, with the help of Fox Propaganda, just weren’t thinking clearly.

But big things have changed since 2004. In 2004 it was still possible to think of our nation as “Number One” without seeming delusional. The 9/11 attacks had knocked us back on our heels, but we had responded forcefully. We hadn’t captured bin Laden or Zawahiri, but we had routed the Taliban in Afghanistan and seemed to have things under control there. Even in Iraq, where our forces were still searching for WMD, the civil war hadn’t erupted yet. Moammar Kadafi in Libya, having seen what we had done to a similar erratic dictator in Iraq, had voluntarily given up his nuclear weapons program.

At that time, we seemed to bestride the world like a colossus. The division at home remaining from the 2000 election—and just about everything else—didn’t seem to matter much. The nation had no idea of how bad things were just under the surface.

Economics told the same story. The dot-com bubble had been a little one, a minor outburst of irrational exuberance. It had few repercussions outside the stock market and Silicon Valley. By 2004 it was almost forgotten. It seemed like a speed bump on the road to even greater prosperity for a people who proudly proclaimed themselves teachers and leaders of the human race.

But there was rot under the surface. After 2004, it began to emerge like antibiotic-resistant bacteria, eating away at our muscles and skin.

The rot affected our military and financial strength, which of course are interlinked. Our misconceptions of Iraq bogged down our forces. The civil war of 2006-2007 infected our self-confidence. So did our neglect of Afghanistan. What had seemed like a masterstroke of military strategy and clever subversion there turned out to be just one battle in a long civil war, in which we may have taken the losing side.

Economically, the rot was much, much worse. For thirty years we had neglected the critical problem of dependence on foreign oil and the universally predicted advent of “peak oil.” For a shorter time, but at least since Bill Clinton’s tenure, we had gone on a wild bender of deregulation. We had allowed not just ideologues, but the stupidest, most short-sighted, greediest of them, to take over our entire financial system and turn it upside down.

Both of these problems erupted like skin lesions during Dubya’s last term. Gasoline shot to over $4 per gallon and diesel fuel to nearly $5. The Great Economic Collapse of 2008 followed in quick succession.

Ironically, the second disaster mitigated the first. The global economic collapse killed demand for oil and gas, so the price of gasoline dropped to a livable range. But with global economic recovery, it’s already $3 a gallon ($90 a barrel) and headed north. OPEC has just announced that $100 a barrel would be fine, and there is no evidence that even OPEC has the spare capacity to keep it from going beyond that.

China is already the world’s largest car market, and India is not far behind. If they both keep building gas-driven cars, the sky’s literally the limit for the price of oil and gas. Whatever you may think about peak oil, no one can doubt that oil is getting harder and more expensive to find and extract, even discounting disasters like the Great BP Oil Spill.

So despite decades of awareness, we have still have three monumental problems that are causing our national decline. We have to wean ourselves from the foreign oil tit. We have to wrest our financial system back from the gamblers and swindlers and return to making and building things. And we have to come up with the money to create an alternative energy infrastructure, repair the badly dilapidated infrastructure we already have, and (at the same time) mitigate the hardy consequences of the biggest economic collapse since 1929. We can’t do any of that without money, and we are broke.

That’s why the President’s “base” has gone ballistic over The Deal. It’s not just that tax cuts for the rich are an unwarranted concession to the worst scorched-earth, nation-be-damned politics since our Civil War—although they are. It’s not just that the President promised to end them—although he did. It’s not just that the President could avoid them with a stroke of the pen—which he can. It’s not just that the tax cuts are spectacularly unfair and counterproductive—which they are. It’s that we can’t solve our national problems without money, and we can’t get the money we need without raising taxes. It's that simple.

Unfair and unwise taxation creates a negative feedback loop that hastens our national decline. When I was born in 1945, our top tax rate was 94%, on all incomes over $200,000. (No, that’s not a typo; look it up.) Capital gains were taxed less severely. The clear message to plutocrats was: put your money where your mouth is. You claim to be clever and productive. If so, great. If you invest in private business or infrastructure, we’ll tax you lightly.

But if you want to keep your money for multiple homes, yachts, excessive consumption, the kind of jewelry that royalty wears, supporting idle children, or subverting our political system with corruption and propaganda, no deal. You can put your money back to work, or you can give it to your government, which will put it to work for you. Take your pick. But one way or another, your excess wealth is going to go to work for the common good.

Today, the top tax rate is 35%, where it has been since 2003. The capital gains rate is down to 15%, but it doesn’t seem to matter much. Excessive consumption among the rich is rampant. The nonfinancial corporate world has $1.93 trillion in cash but isn’t investing in industry or employment. Donald Trump is a hero, or at least a celebrity.

The sixteen plutocrats—every one of them outside the fossil-fuels industries—who just agreed to give away billions from their personal fortunes (not coincidentally while The Deal was being negotiated) are only the tip of the iceberg. The Koch brothers and Rupert Murdoch aren’t giving away any of their idle wealth. They’re using it to subvert our democracy further and to enrich themselves while we as a nation decline.

Although seldom articulated, this is the reason why Democrats, including relative centrists like me, are going ballistic. The President is a good and smart man. During his campaign, he saw many ordinary people suffering for lack of health care. So he made fixing our abysmal health-insurance system his first priority after economic stimulus.

He did a reasonable job, against enormous, entrenched opposition. But it’s becoming increasingly apparent that spending so much political capital on health-insurance reform was a mistake. The reform requires lots of money up front, to the incidental benefit of insurance and drug companies, with only a CBO promise of eventual deficit reduction. The fix was far, far more complicated than it need have been. But most of all, it took our eye off the ball.

Besides education and our straitjacket Constitution, we have three major, intractable problems that appear increasingly likely to bring us down: energy dependence, financialization and loss of manufacturing, and the unwillingness to any spend money collectively, as a society, to improve our condition.

The President made a good down payment on solving the second problem with his financial reform bill. But it remains to be seen whether even it is tough enough. Just today, the New York Times reported that derivatives are still largely (and secretly!) in the hands of the same people who caused the Collapse of 2008.

As for the other two problems, there is not even a down payment yet. The so-called stimulus money for energy—even for something as mainstream as nuclear power—is minuscule. There is little federal leadership and guidance of the private sector. And The Deal walks us backwards toward greater insolvency, less fiscal flexibility and responsibility, and more room for Republicans to demagogue debt, “starve the beast,” and continue building excess wealth not just in the private sector, but also in the bank accounts of the individuals who run it.

So what’s going on is far from a temper tantrum among the President’s liberal base. The media ought to be ashamed for portraying it as such. It’s a realistic and sober conclusion that the very President whose wisdom, intelligence and sense of perspective we counted on to right our foundering ship of state has failed us badly this time.

The President’s support in 2008 went far beyond self-identified liberals, who now represent less than one-third of our voters. His education, mind and character won him wide support across the board.

Why? Because we all thought he had the ability to see through churning chaff to grab the wheat. We thought he understands what really matters and what we need to get back on our feet. Now we are beginning to wonder.

We can’t get back on our feet if we’re wasting nearly a billion dollars a day on foreign oil. We can’t get back on our feet unless we transform our entire energy infrastructure, in less than two decades, to something more sustainable. We can’t get back on our feet unless we begin to make things again, instead of shuffling paper.

And we can’t make real progress on any of these things unless we all start paying more taxes and building our government back into a partner with industry, not an emaciated serf capable of being drowned in a bathtub.

To be sure, there’s symbolism in tax cuts for the rich. They stand for our multi-decade deviation from the sound economic policy of the postwar period, which once gave us the brightest future in human history. There is also simplicity: the wrongness (in every sense) of continuing tax cuts for the rich at a time of accelerating national decline is not hard to understand. But most of all, there is substance.

Tax cuts for the rich are bad morally. They are dispiriting and destroy social cohesion. They waste national resources at a time when we have too few of them. And they encourage people who think they are smart because they have money to ignore the common good and use their wealth to throw us further off the path of national salvation.

The President saw clearly the folly of invading Iraq at a time when everyone else was beating the drums for war. Besides the 2008 economic collapse, whose extent was not entirely clear on election day, that single act of wisdom and perspective was probably most responsible for his election. But now, when we need his wisdom and perspective most, he seems to have lost them, in favor of feckless compromise with declared enemies who have made their sole goal his personal defeat.

The disappointment we feel is far, far more than an ideological tantrum. It is a sense that we all—including the President—are playing out a vast tragedy of Shakespearean proportions.

Coda: Is the President a Bleeding Heart?

One of the worst lies about the President is that he doesn’t care about ordinary people. Of course he does. If you couldn’t get that fact from his career as a community organizer in one of the most blighted areas of Chicago, you can just look at his most difficult and controversial decisions as President.

Why did he spend so much political capital on such complex half measures for health-insurance reform, when we had and have so many other serious problems? Because on every stop of his year-long campaign, he heard real stories of unnecessary suffering, pain and death from people with no or bad health insurance. I have rarely seen real passion in the President (except on occasion when his judgment is challenged), but he told those stories with real passion. No one could doubt that his primary goal in health-insurance reform was to alleviate real suffering that has no place in a first-world country.

That same point, I think, is what motivated The Deal. The President just couldn’t stomach the thought of millions of honest Americans, willing to work but without jobs, ending up on the streets, in the middle of winter, when their unemployment insurance expires. And he knew from experience that the soulless GOP would hold them hostage without mercy.

He just couldn’t do that to the “little” people who look to him alone for relief from suffering. So he made The Deal, breaking his promise not to extend tax cuts for the rich and maybe ruining his chances for winning in 2012. It was a noble self-sacrifice for ordinary people at the bottom of the heap.

I have no quarrel whatsoever with that motivation. It is a good one.

But there’s a difference between being an effective champion and a bleeding heart. There’s also a difference between short-term relief and relief that lasts for the medium and long term.

We still don’t know whether the GOP was bluffing because no one called its bluff. The President didn’t bargain hard; he didn’t even threaten a veto. By wearing his heart so conspicuously on his sleeve, he let his vicious enemies run over him and back him into a corner, where he had to agree to counterproductive policies.

More important, problems for the people at the bottom whom he cares about are likely to come thick and fast. Gas prices are already rising. I wouldn’t be surprised if they get back to $4 per gallon within two years. If that happens by 2012, with all the general economic stagnation it implies, the President will almost certainly be a one-term president. Who will protect the weak and helpless then?

We have been facing financialization of our economy for about thirty years, and economic devastation from oil dependence for nearly forty. These always seemed like long-term problems. But the long term doesn’t stay long forever.

If we don’t soon get about the serious business of converting our transportation infrastructure away from oil, the resulting economic devastation will be far more severe, far more widespread, and far longer lived than any temporary hardship to people denied unemployment insurance while the GOP slowly decides not to commit political suicide. Imagine how life will be for those same people, many of whom live far from any available jobs, when gas hits $8 or $10 a gallon?

We have, at most, twenty years to get energy right. We may have less than ten. (And these numbers are completely independent of any concern about global warming. They’re just a matter of supply and demand.)

We just can’t wait two more years for private industry to decide to act. We have to push it, and that’s better done with subsidies than a gas tax or cap and trade, which seem politically impossible. You can’t subsidize or build without money, which requires raising taxes.

The same is true for manufacturing. Converting our energy infrastructure will produce many domestic jobs that can’t be outsourced. Even if we get the electric cars and solar panels from abroad, someone will have to service the cars and install their charging infrastructure and the solar panels. Infrastructure conversion is the only new industry that promises anywhere near the number of jobs needed to keep us from falling into a depression or (worse yet) protectionism that leads to a global depression and maybe war, just as in the last century.

So when I say my opposition to The Deal is cold and sober, I mean that literally. Like the President, I’m not indifferent to the people who would suffer in the short term from Republican hostage-taking. It’s just that I think they will suffer a lot more—and probably a lot sooner than anyone thinks—if we don’t raise taxes, restore our government to health and effectiveness, and start working soon on the things that are even now reducing us to third-world status. Chief among them is spending a billion dollars a day on a non-renewable resource which the whole globe uses, demand for which could spike, or supply for which could drop, at any time.

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