Credit, Debt and the National Debate

The endless political squabbling in Washington, D.C. regarding the national debt and fiscal policy received unwelcome input from Le Market last week when for the first time in 70 years the Standard & Poor's credit rating agency issued a "negative" outlook on U.S. debt. The rating itself was kept at Triple A, the highest available. but the move from "stable" to "negative" implied a 33% (one out of three) chance of going through with a real credit downgrade in the next two years.

According to Taipan Daily and thousands of other observers, the move is seen as a warning to Washington: “Dear politicians: Stop spending like drunken sailors. (With apologies to drunken sailors, who, as Steve Forbes has noted, at least protect the country and spend their own money.)”

By most current measures, the partisan gap between Democrats and Republicans has reached nearly I-MAX proportions ­with Republicans accused of throwing widows, orphans and people with disabilities to the wolves (while constantly calling for additional tax cuts for top earners). Democrats alternatively, are generally accused of living in a profligate fantasyland, taking the country down a fiscal road to ruin.

In-fighting aside, the numbers simply do not add up. Republicans argue that Democrats, headed by the often demonized President Obama, have been on an orgy of spending resulting in the out of control deficit with which we currently must contend. Putting aside the banking and American automobile bailouts, which, oh, by the way, currently appear to be making money for the American people, such claims simply are not true.

Over the entire 233 year history of the United States, 75% of the current national debt was accumulated during the 20 year periods when Presidents Reagan, Bush and Bush were in office. A full 50% of this accumulated debt was under the watch of the most recent President Bush while he enjoyed a Republican Congress for six of his eight years. The question remains, where were the Republican deficit hawks during this period?

Republicans were busy funding two wars and the associated military industrial complex while simultainiously cutting taxes for the wealthiest Americans. Such efforts help to facilitate our ever widening income and asset inequality. A recent research paper by Ian Dew-Becker and Robert Gordon of Northwestern University, "Where Did the Productivity Growth Go?" provides details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34% or about 1% per year. So being in the top 10% of the income distribution, like being a college graduate, was not a ticket to big income gains.

But income at the 99th percentile rose 87%; income at the 99.9th percentile rose 181%; and income at the 99.99th percentile rose 497%. No, that is not a misprint. As reported in last December's EQUITY, income inequality has reached the point where one percent of the United States population controls twenty-four percent of American income in 2007. The CEO’s of the largest American companies earned an average of 42 times as much as the average worker in 1980 but 531 times as much in 2001. Perhaps the most astounding statistic is this: from 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest one percent of Americans.

Despite such outcomes, Republicans continue to claim that any kind of tax increase would portend doom for a struggling economy and that the countries ever critical job creation would suffer.  Arguably, there may be tax policies which effect job creation, but were no jobs created and did no-one go to work in the fifties when the marginal tax rate was 90%? Did the 70% marginal tax rate of the 60’s and 70’s completely eliminate the American entrepreneurial spirit and stifle innovation for multiple decades?

What Republicans seem to forget is people start a business because they dream of making money, usually a lot of money.  It is enigmatic at best to suggest that such ventures as Federal Express, Google, Starbucks or Intel were based on tax decisions. Did Steve Jobs and Steve Wozniak take this into account prior to starting Apple? If tax rates had been a few percentage points higher, would they just have stayed in bed? Of course not; such rationale is laughable. Such wealth creating people and ideas flourish based on one's talent and visionary dream, not the political machinations of simpleminded tax cuts. At no time in history, ever, has a tax cut spurred innovation, created new technology or directly resulted in entrepreneurial risk. Such childish and simplistic world views are akin to magical thinking, ignoring today’s complex economic, social and business interactions.

According to MarketWatch's Tom Anthony, such claims that tax policy dictates business decisions are nonsense. The tax rate that business owners pay is irrelevant to their decision whether to hire another worker. Money spent on hiring new workers is not taxed at all. Anthony suggests that one consider the dilemma of the business owner who wants to expand. Expansion results in increased business cost, wages, benefits, training, increased materials and equipment. In order to turn a profit, one needs to be able to sell the goods or services they produce for more than the cost of employment. If I cannot sell their product for more than it costs, I will not make a profit, and I should not hire them. My decision is based on two factors: costs and revenues.

Notice, the decision does not depend on ones tax rate. Taxes are paid on the profits received, not on costs of doing business. In fact, when tax rates are higher, business owners have more of an incentive to purchase new equipment, thus reducing taxes owed. 

The Republicans conveniently forget that 22 million jobs were added even as Bill Clinton raised taxes on the wealthy. Notably, not a single Republican voted for those tax hikes because, they told us, taxing the wealthy would kill the economy and cause unemployment. They were, of course, spectacularly wrong, with the Clinton years bringing unprecedented prosperity at all income levels, not just for the top one percent.

So, given that tax rates on the wealthy are not particularly tied to employment or entrepreneurial risk taking, what is the likely result of republican tax cuts or elimination of inheritance taxes for those privileged enough to benefit? Noted financial columnist and unapologetic Democrat Andrew Tobias provides an honest appraisal of how he might respond to a tax cut.

Let me tell you what will happen if Congressman Paul Ryan succeeds in cutting my taxes $50,000:  I will pay $50,000 less in taxes. (It’s not rocket science.)

So a further $50,000 will be added to our National Debt. (Alternatively, $50,000 in benefits to the worst off will be cut, so I can grow richer while they struggle even more desperately; or $50,000 will be cut from our budget to secure loose nukes or our budget to keep our bridges from collapsing or our budget to keep our food supply safe.) 

I will not be hiring a new worker with that $50,000. What I might do with it is buy U.S. Treasury bonds – namely, the U.S. debt that giving-me-my-tax-cut created. (Well, somebody’s got to finance it.) So my balance sheet will be yet $50,000 more happily in the black, and Uncle Sam’s will be yet $50,000 more miserably in the red. 

Pushing tax cuts for the wealthy, particularly after they have been cut so much, contributing to a record deficit, while simultaneously threatening to cut home heating aid, defunding environmental regulation and reducing Medicaid, seems like strange national prioritization.

Defenders of such policy suggestions claim that America over taxes its people and corporations to the point where it becomes nearly impossible to compete internationally in a global economy. However, “in a survey of 28 developed nations by the Organization for Economic Development and Cooperation,” writes blogger Ted McLaughlin, “it was shown that only two of those 28 nations have a lower tax burden than the United States -- Mexico and Chile. Currently all taxes totaled together (federal, state and local) comprise about 24% of U.S. Gross Domestic Product (GDP) -- by comparison, Great Britain’s tax burden is 34.3% of GDP, Germany’s is 37%, and Denmark’s is 48.2% (the highest of all 28 countries).”

Oddly, it remains unclear for whom precisely the Republicans seem to be fighting. A Quinnipiac University poll last year showed nearly two-thirds of those with household incomes of more than $250,000 support raising their own taxes to reduce the federal deficit. Republicans, who apparently still fail to grasp the concept that tax cuts actually increase the deficit, even have demonstrated an emboldened interest in Social Security. Social Security, a system completely separate from all other government agencies, has run in the black and not contributed to the national debt. It has only recently dipped into its huge surpluses do to the economic malaise. While modest increases in the retirement age and income subject to social security tax can indefinitely bolster the system given demographic projections, the notion of including Social Security in the deficit reduction discussion is disingenuous at best. In fact, the U.S. government has borrowed nearly twice the amount from Social Security than from China, and they are just as real dollars as those owed to bond investors.

Curiously, the warning from S&P was greeted by the financial markets with a collective yawn. In fact, the interest rate for long term paper actually moved inversely to what was expected by such news. In the end, a downgrade in credit worthiness would seemingly increase the cost of the country’s debt, but alternatively, the United States has never defaulted on sovereign debt. Add to this, the big three credit agencies recent track record of predicting economic outcomes is questionable at best, so the markets non-response to the news for the moment seems apt. 

Ultimately, some kind of deal will be agreed to by both Democrats and Republicans. It has become clear that continuing to push the problem down the road is no-longer a viable option.  It is likely a matter of choices: tax cuts for the rich or investment in people and infrastructure. Robert Reich, former Secretary of Labor and now with the Goldman School of Public Policy at the University of California, Berkeley, has observed that we may, as illustrated by this most recent economic calamity, have reached a tipping point where the inequality has resulted in a shrinking of the United States economic pie. He argues that it is actually in the best interest of the country’s economic elite to embrace more egalitarian economic and tax policies. Simply put, it is better to have slightly less of a healthily growing economy than more of a shrinking and contracting one. A similar viewpoint was put forth by Garrett Gruener, founder of ASK.com and CEO of Nannomix in his 2010 op-ed piece in the Los Angeles Times, “What will change my investment decisions is if I see an economy doing better, one in which there is demand for the goods and services my investments produce. I am far more likely to invest if I see a country laying the foundation for future growth.”

Perhaps, in the end, a sensible agreement will prevail. Americans tend to pull together best in times of crises. World wars, terrorist attacks, environmental catastrophes do tend to bring people together. Perhaps, going forward, Democrats and Republicans can actually work together in the best interest of the country and all the people they serve, finally starting to build a future of growth for all Americans.