Deficit Reduction: The Great Distraction
from Dean Baker
This is the week of the third annual Deficit Fest, the event sponsored by Wall Street billionaire Peter G. Peterson. At this event, many of the people most responsible for the current downturn come together to tell us why we should be worried about the deficit at a time when 25 million people are unemployed, underemployed or have given up looking for work altogether and millions face the prospect of losing their homes.
Past deficit fests included exchanges where Peter Peterson and former Treasury Secretary and Citigroup honcho Robert Rubin mused about their comparative net worth. We also got to witness President Clinton bemoan the fact that the Democratic and Republican leadership in Congress teamed up to prevent him from cutting Social Security. Had Clinton gotten his way, millions of seniors would be getting by on Social Security checks that are more than 10 percent smaller than what they now receive.
Peterson is also known for his sponsorship of the “Economic Sleepwalk” tour, which was officially billed as the “Fiscal Wakeup” tour. This involved sending a group of policy wonks around the country to complain about the budget deficit at a time when the housing bubble was growing to ever more dangerous levels. While some of us were doing our best to warn of the imminent disaster [2002], Peterson was using his money and political connections to dominate media space at a time when the country’s debt-to-GDP ratio was actually falling.
But why harp on the past? We should be focused on the future.
And one of the items that this group would like to see in our future is a deficit deal like the one proposed by Erskine Bowles and former Senator Alan Simpson, the co-chairs of President Obama’s deficit commission. (The Bowles-Simpson plan is inaccurately referred to on the commission’s website as a report of the commission, ironically on a page titled “Moment of Truth.” In fact, it is only the report of the co-chairs since it did not receive the 14 votes needed to be approved as an official report of the commission.)
This plan includes a wide range of budget cuts, including cuts to Social Security and Medicare. It would reduce the annual Social Security cost-of-living adjustment by 0.3 percent, which would lower lifetime benefits by an average of more than 3 percent. It would also raise the retirement age for Social Security. To balance these cuts to programs that benefit tens of millions of ordinary workers, Bowles and Simpson would cut the corporate tax rate from 35 to 28 percent and would lower the tax rate paid by the very wealthy from 40 percent to 28 percent. While these reductions in tax rates are supposed to be offset by the elimination of loopholes that benefit the wealthy, people have good cause for skepticism.
If these policies seem out of step with the interests of ordinary workers, it should not be surprising given their parentage. Erskine Bowles in particular could be the poster boy for everything that is wrong in national politics today. Bowles rose to become chief of staff in the Clinton White House in the 90s. He then twice competed unsuccessfully for Senate seats in North Carolina. As a consolation prize he became the President of the University of North Carolina.
Since it is hard to make ends meet on a university president’s salary these days, Mr. Bowles also did a little bowling for dollars. He moonlighted as a director on corporate boards, serving stints at Morgan Stanley, the huge Wall Street investment bank, General Motors (until it went bankrupt), and most recently Facebook.
Being a director on a corporate board typically involves attending 4-8 meetings a year. For this, directors receive several hundred thousands of dollars in compensation. For example, in 2008 Erskine Bowles received $335,000 in compensation for his work on Morgan Stanley’s board.
This year is noteworthy because Morgan Stanley’s dealings in mortgage-backed securities brought it to the edge of bankruptcy in the fall of 2008. It was only saved from disaster by the generous intervention of Ben Bernanke. He allowed the bank to change its status in the middle of the post-Lehman crisis, and become a bank holding company. This gave it the protection of the Fed and the FDIC.
Given this near brush with death, shareholders might ask what Mr. Bowles did for the $335,000 that we paid him. “We” is appropriate in this sentence, since much of the public has a stake in Morgan Stanley either through an index fund in a 401(k) that likely holds some of the company’s stock or the defined benefit pensions that most state and local governments still have for their workers.
In fact, we should be asking this question of directors more generally. When shareholders voted “no” last month on the pay package of Citigroup’s CEO, Vikram Pandit, they were saying that the company’s well-paid board was not doing its job. These directors were getting paid $250,000 each year for just a few days’ work. Their job is precisely to prevent such outlandish pay packaged for top management.
The failure of these highly paid directors is a major national problem. Their compensation looks more like payoffs than paychecks. After their palms get greased, they look the other way when the CEOs walk away with tens or even hundreds of millions of dollars of the shareholders’ money. And the outsized pay of the CEOs corrupts pay scales throughout the economy. Even heads of charities can now command pay packages in excess of $1 million a year.
Anyhow, when we hear Erskine Bowles and his friends rant about the deficit this week, we should remember that once again they are distracting the public from the country’s real problems. And this crew is at the center of those problems; it is not the solution.
Of course deficits matter if the tax system is insufficiently robust. But a robust tax system is one that would get the millionaires into a situation where they could not avoid paying their due.
But then again when has Dean Baker ever argued for such a tax reform? His silence to date is deafening, which makes one wonder how sincere he really is. Since Baker has never spelled this out, I will.
What is needed is a shift from existing taxes on labour and production to a tax on the annual rental value of land – this to be the principal source of public revenue.
Deficits really do matter, not because the millionaires are saying so, but because the tax system is insufficiently robust. The millionaires would not like a robust tax system because they could not avoid paying their due.
But if Dean Baker has ever argued for such a tax reform, I have never seen it. The silence to date is deafening, which makes one wonder how sincere he really is. In view of Baker silence I will spell this out myself.
The reform is Land Value Taxation: existing taxes on labour and production are largely replaced by a tax on the annual rental value of land.
Dean’s point is extremely well taken. Here in the US people of good intentions and good hearts are often so appalled by the viciousness and down-right fascist instincts of what passes for the Republican Party these days that establishment Democrats like the Clintons, Larry Summers, Erskine Bowles, Tim Geithner, et al GET A PASS — “At least they’re not like those crazies,”
However, by not providing a strong alternative — a true American version of even European Social Democracy would be a start if insufficient — they leave the policy-making, journalistic, and intellectual field to the other side.
Hence the triumph of neo-liberalism — arguably the final triumph occurring on Clinton’s watch with the final end of New Deal Financial regulation, the celebration of “Saint Alan” at the Fed, and the false historical lesson drawn from the alleged “fiscal sanity” achieved when the Clinton federal budget went into surplus (ignoring that it was a bubble driven very temporary spike in revenue that did that).
Obama’s awful domestic failure (to be generous to him, we could say “tragic”) was to bring in the same old Clinton team, many of whom helped set the stage for the financial crisis, and give them the order to hit the reset button on the financial system and “assume” against all historical precedent that the rest of the economy would take care of itself with a minimal stimulus.
At the VERY LEAST, when they squeaked the first stimulus through they should have added to section that provided for the VERY SAME round of stimulus spending a year later to kick in automatically if the unemployment rate did not fall below XX%. THey had the votes to do it — and it might have made a great macro-economic difference.
SO it goes!
I dont know why we have such avid interest in land tax when the reform is to raise the damn marginal income tax rate on personal income tax (ie reverse the stupidity pf previous lowerings becaise trickle down is a freaking abject failure).
Lets start with the obvious before we go off on another tangent and explore philosophiocal / economic ideas about land…Lets just undo what we did wrong first. The rich dont pay enough personal income tax BECAUSE we lowered it under false pretenses and under the false idelogies of the stupid Greenspan era.
How hard can it be? We lowered it pretty damn easily. Just reverse the mistakes.
Trickle-down will always be a failure because it ends up in landowners’ pockets, as predicted by Ricardo and confirmed by observation. That is why there is a need for land tax, and the right sort of land tax at that.
The reduction of marginal rates at the top end means that tax revenue is lost that mostly would have been not have been paid anyway, as people in the high income range make sure they avoid it by exploiting the loopholes. The same applies to corporations. They can duck out of paying tax.
The reduction of tax thresholds at the bottom is often critical in determining whether someone will be employed or continue on welfare.
These are just a few of the reasons why present systems of taxation of incomes and corporations need to be replaced by a tax on the rental value of land. The present systems do not work, and cannot be made to. It is not a matter of reversing the mistakes. The taxation of wages, goods, services, profits and incomes is a mistake. To attempt to go back to that point would be futile.
And furthermore – the compensation of some of these idiots who hark on about the deficit and cutting spending and social welfare
is actually obscene.
Lets not lead by example here…no belt pulling in, in the deficit hawk ranks, lets not look at their ridiculous earnings shall we (no look away, look away..)
Those “ridiculous earnings” are not earnings at all. If you examine this in detail you will find they consist of rent of land. Another reason for a land tax. Get this revenue stream at source before it can be spirited out of reach of the tax authorities. Once that is done the only way to get rich will be to produce something or provide something that people want. Financial jiggery-pokery will be fruitless.
Good point Henry. There certainly is a bit of jiggery pokery done with income tax but I dont think it fair to levy any flat tax on land rental values because how does your land tax affect the efforts that “not wealthy” people go to just to keep a roof over their head and the measly bit of land they may own in the family home – and some family homes are pretty basic and they may not have much extra money to pay this land tax each year? And whats not to stop the jiggery pokery still going on by the rich with their army of tax advisers? So they own a bit less land (ie sell out of the asset land as much as they can and into shift into something else pronto). The rich arent the only landowners. Seems to me a comprehensive package needed anyway to get them to carry their fair share of the tax burden in order to reduce the now outlandish inequality levels in many countries.
I really think companies should be forced to have one and only one domicile and / or it should cost them dearly to change addresses. Thats a lot of the problem – this freedom of capital to go shopping for tax free havens (premised on the assumption of trickle down).
Alice, time to read Progress and Poverty by Henry George. Whoever said anything about a Land Value Tax being a flat tax? It is a tax based on the annual rental value of land. And if the system is set up properly it cannot be avoided, for example by clever accountancy or through the use of tax havens. If land is of low value then the tax is low. The poorest people pay the most tax under the present system because tax is built into the prices of everything.
The rich would not be able to sell land and buy a different class of asset. They might sell and buy land abroad, but the land would remain. Land is the only durable asset. Most of the value of “securities” consists of land, wrapped up in some other package. Most of the rest is patent rights, which is another area that needs to be dealt with.
“Not wealthy” people rarely own, outright, the land on which they live, and they almost never own the land they work on. They spend most of their lives paying rent to the banks for the land they may one day own, if misfortune does not intervene and the bank forecloses.
Most of the seriously rich have got that way through land speculation, but it also leads to unemployment, and periodic boom and bust. If you are not in favour of this reform, either you do not understand it and its implications, or you are not serious about the need to address the problem.
Dean Baker has succeeded in gaining a public platform but sadly he has never breathed a word on the subject.