My latest Good Fences column looks at the gloomy state of the economy and argues that it’s a mistake to blame either President Obama or the recent President Bush. What we’re experiencing actually is the collapse of a snake-oil economic cult theory that’s had us in its thrall for the past 30 years or so, the so-called Washington Consensus, also known as Reaganomics. In this blog post I run through some of the sources for my numbers, so you can check my math or even do your own exploring.
My column looks mainly at the paradoxical results of lowering taxes in order to encourage economic growth, which is a core tenet of our post-1980 economic faith. Between 1946 and 1980 the top income tax rate averaged around 80%. In the 30 years since then, the top rate has averaged around 35%. For some reason, the past 30 years have not seen increased economic growth. What they have seen is an explosion of the national debt, plus a colossal divergence between the incomes of the richest Americans and everyone else.
There are lots of other factors besides tax rates that play into the divergence, including deregulation of finance, killing off labor unions (thus increasing the bargaining power of the employer versus the wage-earner), technological changes and more. Slate.com has run a magisterial series by Timothy Noah, “The Great Divergence,” that explores the various factors, one by one. It’s worth the time.
Two recent newspaper articles have done a particularly powerful job of illuminating less-noticed aspects of the current crisis and its human impact. From The New York Times, “For the Unemployed Over 50, Fears of Never Working Again.” And from The Washington Post, “Families struggle to build nest egg in wake of recession.”
Some people find it hard to believe that income tax rates used to be at 91% in the good old days. Well, it’s true. No, nobody paid 91% of all their income in taxes. It was a marginal rate — the amount you paid on any income above a certain ceiling. Today’s top marginal rate, for example, is 35%, but it only applies to your earnings after your initial $312,000.
This chart shows you the top marginal income tax rate, year by year, going back to 1913 (when income tax began), along with the cutoff point in earnings above which the top rate was applied.
The marginal rate throughout the Eisenhower and Kennedy administrations — from 1951 (under Truman, actually) through 1963 — was 91% on income above $400,000. (Calculating for inflation, $400,000 back in 1963 was worth about $2.8 million in today’s dollars.) The only president whose full tenure coincided with the confiscatory 91% marginal rate was Dwight D. Eisenhower, Republican.
Los Angeles Times business columnist Michael Hiltzik has an essential piece today debunking what he calls “The Myth of the Social Security system’s financial shortfall.” It’s based on the newly-released 2010 report of the Social Security Trustees.
In fact, he argues, Social Security is doing fine, sort of. If there’s a problem, it’s the fact that it has been lending money to the general fund of the federal government for years to cover expenses that used to be covered by income taxes. The payroll tax has been steadily raised to keep Social Security solvent. The income taxes of the wealthiest Americans have been repeatedly, drastically lowered under Ronald Reagan and George W. Bush (Hiltzik leaves out Reagan, as I’ll show), leaving big holes in the general fund, which covers defense, national parks, highways, welfare and all the rest. The impoverished general fund has been borrowing from the flush Social Security trust fund to help cover the deficits.
Here’s the catch: The payroll tax is a regressive tax: the poorest Americans pay the same 7.65% as the richest Americans, and the rich don’t even pay a penny on earnings above $107,000 per year. Lowering income taxes on the rich, and then covering the shortfall by borrowing from a pot that’s mainly funded by the common folk (and mainly relied on by them) amounts to a massive redistribution of income from the poor to the rich. And that’s why the Social Security trust fund looks insolvent: It has been raided to cover money that used to be in the federal budget but is now in the pockets of the rich.
I know, I know: Letting the affluent keep their money (they’re basically the only ones who get to do that under these tax cuts) encourages investment and creates jobs. If anybody here still believes that, I’ve got a lovely oil well to sell you, conveniently located just south of historic New Orleans.
In recent years, during which conservatives have intensified their efforts to destroy one of the few U.S. government programs that actually works as intended, the report’s publication has become an occasion for hand-wringing and crocodile tears over the (supposedly) parlous state of the system’s finances.
This year’s report, which came out Thursday, is no exception. Within minutes of its release, some analysts were claiming that it projected a “shortfall” for Social Security this year of $41 billion.
You may or may not have noticed this story on the front page of The New York Times. Its main point is that the dizzying growth of our national indebtedness poses a threat not just to America’s economic health and future but to its role in the world.
Even if you don’t much follow global economics, keep reading anyway, if for no other reason than this: As America’s role goes on the world stage, so goes Israel. A weak America can’t protect an embattled Israel. If Israel doesn’t find a way to normalize its relations with its neighbors by the end of the decade, it may have to adjust to life without the protection of the world’s sole superpower. As if.
It’s a shocker, all right — that is, unless you remember this Forward editorial from September 2004. We called this one way early. More about that below.
According to today’s Times, President Obama’s new budget shows next year’s federal deficit — the difference between the government’s income and its spending for the year — reaching 11% of the total Gross Domestic Product (all the money earned and spent anywhere in the country during the year). That’s a higher proportion than at any time since World War II. And back then, remember, borrowing ballooned to pay for a world conflict, and settled down again when the emergency was over. Our current imbalance isn’t an emergency response. It’s just our new normal. Obama’s budget, the Times writes, “draws a picture of a nation that like many American homeowners simply cannot get above water.”
The problem is more than just a matter of annual borrowing. Three decades of borrow-and-spend government (the numbers are below) have piled up an accumulated national debt that recently topped a colossal $12 trillion. That’s about 83% of our Gross Domestic Product. If we were any other country, the IMF would have put us in receivership by now. Fortunately, we run the IMF. For now.
Even scarier, the new budget forecast shows the situation continuing to the end of the decade if not beyond, according to the Times (I’m not sure they’re entirely correct on that detail). Absent “miraculous growth, or miraculous political compromises,” the Times reports, America faces a steady decline in clout on the world scene.
Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”
Is this just fear-mongering? No. The screws are already getting set to tighten.
The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade.
Mr. Obama himself hinted at his own concern when he announced in early December that he planned to send 30,000 American troops to Afghanistan, but insisted that the United States could not afford to stay for long.
Without a strong economy to pay for it, Obama said in that December speech at West Point, “even a ‘war of necessity,’ as he called Afghanistan last summer, could not last for long.”
So what does this have to do with Israel? Well, here’s what we wrote back in September 2004, just before that year’s election: