A Left of Center Budget?

What would it look like?

All the talk so far has centered on the far right plan of the Republicans – a.k.a. the Ryan plan – and Obama’s counter offer, which is more right of center than the media imagines, because of its emphasis on cost cutting rather than revenue raising. This means that there isn’t much of a left of center option available or being discussed. That is except the plan developed by the Congressional Progressive Caucus which goes under the name of ‘The People’s Budget’. They place the emphasis on balance and fairness. So should we.

In that spirit, let me step back and articulate my plan:

First, we should not get swept away by debt panic. The US national debt is high, but not unmanageable. Indeed nowhere other than in the fevered minds of the austerity hawks is it an immediate problem. Obviously debt as a percentage of GDP has risen sharply in recent years. But, in case you’ve been napping, we’ve had a slight problem. The Great Recession knocked a huge hole in an already depleted government revenue stream. Federal government revenues as a percentage of GDP have plummeted from the 20% range to the 15% range. Since, at the same time, spending has risen as various safety net programs kicked in, the deficit has shot up.

Duh. Even a fool can see that much of the current imbalance is short term, or cyclical, and thus will automatically go away once the economy is back on track. Which is why, of course, we should put the highest priority on getting the economy moving at a solid rate. You’d think this would still be a high priority, but the talk has shifted away as if the problem is solved. But it isn’t. We need to work harder.

So any plan to correct the deficit should begin with a plan to maintain a boost to the economy.

Second, we need to address the long term creep in inequality. I have been beating this drum for a while and still believe it to be one of our highest strategic goals. We need to restore a better balance between wages and profits. This would send more cash into average household pockets where it is more likely to end up as consumption, and thus boost aggregate demand.

Third, we need to protect the entitlement programs from unnecessary attack. These programs are vital to the middle class way of life, and they protect the poor, sick, and elderly. Reducing them would impose a cost on those groups disproportionate to the benefits they have garnered from recent economic growth. It is one thing to argue people ought to suffer cuts. It is entirely another to argue that point after having initiated a long term squeeze on their lifestyles already. It may well be that entitlements need to be trimmed – although the urgency and extent is highly debatable. If so a spirit of fairness demands that those who benefitted most from the Reagan/Bush era bear the first and largest brunt of the burden.

Fourth, we need to clean up the more egregious, and deliberate, ways in which those with resources escape contributing to the common good. One example of this is the foreign based profits of business. Corporate profit is only taxed when it is brought back onshore in the US. So most large companies have fictitious subsidiaries abroad where they park profit. To accomplish this wheeze they maneuver costs into the US, and so reduce their taxable income here, and shove income offshore to ‘harbor’ it safely beyond the reach of the IRS. This tax dodge is so significant that has distorted corporate balance sheets. It is one reason why companies are sitting on piles of cash yet don’t invest it – they can’t invest it here. The Chamber of Commerce recently advocated a tax amnesty during which businesses could repatriate this cash without being subject to the full rate of corporate income tax. Their argument was that business isn’t investing because high marginal tax rates on profits “forces” companies to cheat in the way I just described. This is, of course, nonsense. I have a better idea: we should simply tax profit when it is made, and not only when it arrives back in the US. This removes the incentive to cheat – companies are getting taxed anyway. Besides: there is no evidence that it is tax policy undermining corporate investment. The real problem is that businesses have low expectation for demand. Thus they hold back on expansion plans.

Along with this adjustment to corporate taxes, we need to change the way in which capital gains are taxed. Capital gains are income. Since, in the immortal words of the British Law Lords, income tax is a tax on income, it makes no sense to tax income derived from capital at a different, and lower, rate than income derived from labor. Why should workers be subject to higher marginal tax rates? This change makes even more sense when we recall that hedge fund manager’s entire income is classified as a capital gain, and thus is not subject to income tax. So many of our highest paid workers are exploiting a loophole. It needs to be closed in the spirit of fairness.

Fifth, returning to government revenue, and in light of the above, any fair plan to reduce the budget has to include revenue increases. Taxes must go up. The US is a low tax state. By any comparison we pay less tax than our peers abroad. We have cut that already low level of taxation even more over the past few years. The result is that we defunded government. This was deliberate. It was unfair. It was dangerous. It remains a basic tenet of right wing plans. Even now, with government revenues in the tank, the Republicans are adamant that any deficit reduction cannot include tax increases. This places the entire burden for fixing the problem on the weakest members of society. If successful the Republican plan would alter our country’s social fabric and propel us even more into an unequal, bifurcated, and poverty stricken state than we already are. We on the left need to be equally adamant that fairness dictates tax increases on those who most can afford them. Besides: the era of greatest US economic growth coincided with an era of high marginal tax rates. There is no cause and effect there. But neither is there any evidence that high taxes diminish growth. They didn’t. They still won’t. Indeed, it could be argued that by sopping up some excess cash from higher wage earners we would reduce the flow of money going into coffers of the gamblers on Wall Street. Killing two birds with one stone is always a bonus.

Sixth, I think we need to engage in some industrial policy making. We should use the budget debate to allocate capital to industries and projects that pay off in the future. Free market advocates cringe at the very thought. They argue that government is incapable of making sound investment decisions. Or, at least, that the government is less well equipped for that task than private enterprise. This would be the same private enterprise that just produced the back-to-back epics of the dot-com and real estate bubbles. Neither exactly reinforces the image of the private sector as an efficient allocator of investment capital. Meanwhile the government’s early investment in the internet is a good counter example. We need to expand, not diminish, the role of government in industrial investment.

Seventh, let’s get rid of those agricultural subsidies. If we want to keep some for small farms, so be it. But large industrial farming doesn’t need our help.

Eighth, cut military spending. It would help, of course if we ended those Bush wars as well. The basic structure of the military needs to be changed to face forwards and not backwards. That implies less Navy and Air Force, and more Army and Marines. Plus we need to cut away at the unchecked pork flowing through the Pentagon into unneeded and often useless projects. We have to come to terms with the simple fact we cannot afford to spend what we do. And we need to realize that cuts don’t mean less security. Indeed, a more efficiently run, and forward focused military, would mean more security. It isn’t how much we spend. It is how we spend it. Pet projects for generals are not protecting us. Besides, as I have asked before: why does the US need to spend many times more on offense defense than the next ten largest military budgets combined? Are our generals that bad that they need to make up for it with cash?

Ninth, and last in this summary, we need to use the budget debate to attack the banks. OK, maybe ‘attack’ is not quite the right word. But we need to make finance less attractive, so we can move the nation’s store of capital back into industry where it is not subject to the volatility of banking, and where it would produce a greater number of middle class jobs. The main point here would be a tax on speculative activity to make it more costly to gamble. We could go further and impose a tax to recoup the costs imposed on society by the banks when they drove it over the cliff in 2008. But that might just be me indulging in an extra fantasy.

OK. Let me summarize:

1. Raise taxes on the wealthy and corporations. Let the Bush tax hikes come into effect and close foreign tax and other high end loopholes.
2. Protect entitlements and safety net features of the economy. Adjust them maybe. Cut them? Not at all.
3. Cut, and re-orient, military spending. It’s time to end those wars as well.
4. Deal with inequality and inject fairness back as guiding principle of policy.
5. Get government back into industrial policy.
6. Tax banks/banking transactions to reduce the size of the banking industry, and to encourage the flow of capital to less volatile industries.

That’s my first, rough, attempt at a plan. It leaves health care spending out, since I assume that the recent reforms will stay in place and thus diminish Medicare spending.

What’s your’ plan?