Thursday, May 24, 2012

Speaking of austerity

By Carl 

When you compare them head-to-head, the Obama and Romney tax plans are nearly identical:

Mitt Romney, the Republican candidate, is offering a 20 percent tax cut for everyone. Given the mood of the conservatives in the United States today, that may not surprise you. But even President Barack Obama, who is routinely described as a socialist by his opponents, is peddling a plan under which 99 percent of Americans would pay less than they did under the last Democrat in the White House, Bill Clinton.

A 1% difference really is no difference, unless you're in the one percent. But they can afford it, to be sure. But here's the interesting thing:

According to the International Monetary Fund, in 2011, among the world's 30 leading countries economically, only in New Zealand and in Japan was government revenue a lower share of gross domestic product than in the United States. Countries like Australia, Estonia, Ireland and Switzerland, which tend to favor low taxes and a small state, have government revenue that accounts for more of G.D.P. than does the United States. 

The Internal Revenue Service is relatively restrained, too, compared with recent history. In 1945, at the close of World War II, federal tax receipts were 20.4 percent of G.D.P. (expenditures, by the way, were 41.9 percent, putting the federal budget deficit at 21.5 percent, compared with 8.7 percent in 2011). In 1952, the year the Republican Dwight Eisenhower was elected president, federal government revenue was 19 percent of G.D.P. In 1988, the last year of Ronald Reagan's transformational conservative presidency, the federal tax take was 18.2 percent of G.D.P.

Compare those figures with that of today, when a Democrat is in the White House, nearly half of Americans think their taxes are too high, and both parties are promising to keep taxes low for all, or, in the case of the Democrats, 99 percent of Americans: In 2011, government revenue was 15.4 percent of G.D.P., lower than it was at any time during the Eisenhower or Reagan eras. Like anorexics, who think they are grossly fat when they are very thin, the American body politic is suffering from a national version of body dysmorphia, with nearly half the country believing taxes are high, when they are comparatively and historically low. 

So everyone agrees that taxes are too high, except history.

Obama's plan at least has the weight of recent history on his side: when Bill Clinton lowered taxes on the middle class and poor but raised them (a whole 4%!) on the rich, the economy skyrocketed from the doldrums of the first Bush recession to have the greatest growth in human history AND created budget surpluses, something even the so-called "Reagan boom" -- which only happened after he raised the taxes he had lowered far too much -- could not achieve.

Indeed, Clinton's economy was so great that we very nearly paid off the national debt. Had those policies continued in place, had the three Bush tax cuts not been passed, and two insignificant little gnats not been invaded for few rational reasons -- meaning Bush would have taken the dire warnings the Clinton policy experts levelled seriously and prevented September 11 -- we might still be on the path to prosperity even now.

See, here's the thing: to look at the economy now and forget those eight years of mishandling is to exam why a bridge collapsed without looking at the corroded metal braces. You might come up with some logical explanation-- too much weight, unsafe drivers-- but in the end, you've missed the point entirely.

We were in the midst of a mild recession when George W Bush took office. After the dot-com bubble burst, we had growth of less than 2% and finally dipped into a contraction as Bush took office. But by that summer, we had nearly reversed that and started growing slowly.

And then we double-dipped in 2002. Despite the tax cuts. Despite the spending on ramping up for the wars in Afghanistan and Iraq. Despite the private sector panicking that al Qaeda was looking over our shoulders for an opportunity to strike again.

Indeed, it wasn't until the third quarter of 2003 that the U.S. began a recovery.

We were almost out in 2001! And you'd think that all the economic stimulus of three tax cuts and two wars and all the homeland security spending -- on the scale of billions when you include private and public sector spending -- would have pulled an already recovering economy straight back up.

And you'd be wrong. Indeed, and here's where we get to this current recession, it turns out that the prime motivator in ending the Bush recession was the move by the Federal Reserve to drop its discount rater (the federal funds rate) from 1.75% to 1%, in steps. This dropped the prime rate to about 4% or so (it generally runs three percent above the federal funds rate, which is the overnight rate that banks can borrow money from each other), and then came all those mortgage refinancings.

Which begat more refinancings. Which begat the "ownership society" of Bush's second term. Which begat subprime mortgages. Which begat derivates of CDOs and CMOs and all those lovely acronyms to represent meaningless valueless gambles disguised as "investments."

And so here we are, still talking about lowering taxes when what we need is a little fiscal discipline and a little fat over the meat on the bone. We need to raise government revenue and have that government spend it to benefit the greater good of all us, get rid of the rust and make the bridge stronger so that we don't grit our teeth and grip the wheel tightly each time we drive over it.

(Cross-posted to Simply Left Behind.)

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