Deficit commission?

By paul krugman

The New York Times

Published Nov 13, 2010 01:01AM
Updated Nov 13, 2010 01:01AM

Count me among those who always believed that President Barack Obama made a big mistake when he created the National Commission on Fiscal Responsibility and Reform — a supposedly bipartisan panel charged with coming up with solutions to the nation’s long-run fiscal problems.

It seemed obvious, as soon as the commission’s membership was announced, that “bipartisanship” would mean what it so often does in Washington: a compromise between the center-right and the hard-right.

My misgivings increased as we got a better feel for the views of the commission’s co-chairmen. It soon became clear that Erskine Bowles, the Democratic co-chairman, had a very Republican-sounding small-government agenda. Meanwhile, Alan Simpson, the Republican co-chairman, revealed the kind of honest broker he is by sending an abusive e-mail to the executive director of the National Older Women’s League in which he described Social Security as being “like a milk cow with 310 million tits.”

We’ve known for a long time, then, that nothing good would come from the commission. Wednesday, though, when the co-chairmen released a PowerPoint outlining their proposal, it was even worse than the cynics expected.

Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21 (percent) of GDP.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?

Matters become clearer once you reach the section on tax reform. The goals of reform, as Bowles and Simpson see them, are presented in the form of seven bullet points. “Lower Rates” is the first point; “Reduce the Deficit” is the seventh.

So how, exactly, did a deficit-cutting commission become a commission whose first priority is cutting tax rates, with deficit reduction literally at the bottom of the list?

Actually, though, what the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and the corporate tax rate.

It will take time to crunch the numbers here, but this proposal clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans. And what does any of this have to do with deficit reduction?

Let’s turn next to Social Security. There were rumors beforehand that the commission would recommend a rise in the retirement age, and sure enough, that’s what Bowles and Simpson do. They want the age at which Social Security becomes available to rise along with average life expectancy. Is that reasonable?

The answer is no, for a number of reasons — including the point that working until you’re 69, which may sound doable for people with desk jobs, is a lot harder for the many Americans who still do physical labor.

But beyond that, the proposal seemingly ignores a crucial point: While average life expectancy is indeed rising, it’s doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age.

Still, can’t we say that for all its flaws, the Bowles-Simpson proposal is a serious effort to tackle the nation’s long-run fiscal problem? No, we can’t.

It’s true that the PowerPoint contains nice-looking charts showing deficits falling and debt levels stabilizing. But it becomes clear, once you spend a little time trying to figure out what’s going on, that the main driver of those pretty charts is the assumption that the rate of growth in health care costs will slow dramatically. And how is this to be achieved? By “establishing a process to regularly evaluate cost growth” and taking “additional steps as needed.” What does that mean? I have no idea.

It’s no mystery what has happened on the deficit commission. As so often happens in modern Washington, a process meant to deal with real problems has been hijacked on behalf of an ideological agenda.

Under the guise of facing our fiscal problems, Bowles and Simpson are trying to smuggle in the same old, same old — tax cuts for the rich and erosion of the social safety net.

Can anything be salvaged from this wreck? I doubt it. The deficit commission should be told to fold its tents and go away.

My Thoughts:

For me there must be more emphases on eliminating all tax deductions and credits that are for special interest groups and large and multi-national corporations. Raise the corporate tax on profits above 1 million dollars, but provide targeted tax credits for U.S. job creation and wage increases to the workers making less than $150,000 gross a year. For example, if a corporation wants to zero out their tax liability, they can get a tax credit of 25% of the annual wages of a new blue collar worker hired in that fiscal year and 50% of the wage increase given to current blue collar workers of the company. This is above the deduction for the worker's wages that they expense out now.

Also no matter where the company is registered, i.e. Bahamas, etc. any business conducted within the United States and it's protectorates and territories would be taxable income in the U.S. No more shifting of revenue to off-shore addresses and maximizing deductions within the U.S. to create artificial losses. There can be some incentives for foreign companies to build factories and jobs within the U.S. to bring back blue collar jobs to America.  We have to start building more stuff in the U.S. in order to get the unemployment down and increase wages for the middle-class. Service industry jobs can not absorb the growth in the population with jobs and they are typically minimum wage jobs as well. Conversely, for every job that can be performed here in the US that is out-sourced to another country, an additional tax would be charged to that company that is equal to 125% of the cost of the out-sourced labor.

Only then will the economy start to grow at a healthy rate and tax revenue will increase relative to the higher number of people employed and paying taxes. This is a minimum of a ten year plan. One of the reasons I promote this idea is that during the Clinton administration there was very low unemployment, rapid job growth and wages increased as well. This all created a situation, with some expenditure reductions and reducing the number of federal employees, Clinton was able to obtain a surplus in revenue. What more proof do you need to see why this should be the plan.

As the economy recovers to a safe level, a modest tax increase will be needed from the middle-class to help pay down the huge debt. The very wealthy need their tax rate increased to the 39% level now to help attack the debt now. They should pay back some of the great wealth they have accumulated off the backs of the blue collar worker over the past decade. The best way to do that is to help reduce the debt.

As I have said before, the very wealthy do not create jobs. Huge profits of corporations do not create jobs. If that was true, we would not have 10% unemployment now, as both the very wealthy and corporations are sitting on 3 trillion dollars in cash right now that can be invested in jobs. Why would they when there is no demand for the product or services that would be created? We have to have a middle-class, the majority of the population, with incomes that allow them to buy things again, not to just survive.

So the argument that keeping the tax rate for those who have a taxable income of $250,000 or more at 35% to stimulate jobs is ludicrous. It does not hold up to logic or history or mathematics. Thus it is false.

I guess those who are Tea Party supporters and Conservatives think they might win the big lottery and they don't want the tax rate too high. Why they are supporting keeping the lower tax rate for the very rich is beyond logic and their best self interest. Can you explain why they are supporting the Republicans demand for keeping the lower tax rate for the rich? If you can, please do with something that holds water (logical).

People want to return the the 1950's when times seamed so great. Why was our economy growing so well back then?

Post WWII in the late 1940's and throughout the 1950's, America was rebuilding its industrial infrastructure to manufacture all the good and new technology appliances that were in great demand. Unions help the blue collar worker receive a fair wage that allowed the family to buy these new handy appliances and a nice new car.

Eisenhower's plan to build a German autobahn across America, the Interstate Highway System, put hundreds of thousands of men to work constructing them with tax payer money in huge amounts. With these new roads came tourism by the middle-class. Remember "See the USA in your Chevrolet?" They would load up the car and family and head to the national parks, national monuments, national forests and recreation parks that had just been improved with the New Deal government works projects that built roads, bridges, campgrounds, lodges and inns within them. Taxes during this time was very high, even for the middle-class, reaching near 50% and 70% for the rich.

Major theme parks were being opened, like DisneyLand and Knox Berry Farm. With more families on the road, they needed less expensive lodging than hotels located in the center of cities, so the motor lodges or motels and gas stations sprang up all along the highways, making traveling fun and easy. It also create more jobs to construct them and run them afterwords.

Technology gained from the war also increased productivity and efficiency without the loss of labor. Communications was revolutionizing with the nation wide television broadcast networks of CBS, NBC and ABC -- there were only three.

With all the returning veterans and their VA benefit of buying a home with a low interest loan and little down payment created a housing boom. Most women returned back to the home and kitchen from making bullets, airplanes, ships and tanks for the war. Wages and benefits were so good that it only took one wage earner per household to buy the new home, car and all the new conveniences, not two like it does today.

Plus, Europe, Japan and China had been destroyed by the war. America and Canada was about the only  industrialized countries to produce the goods needed around the world, as well as the core material to rebuild these destroyed countries.

But we don't have the same situation now. We can't go back to the 1950's, the circumstances are much different.