5 Things to Understand about the Budget Debate

This will be a quickie – I’m trying to get a book chapter written before leaving for spring break, but you faithful readers need something to tide you over. This will be it until mid-March.

As you follow the debate about the budget – federal, but the states are involved, too – just remember these five things:

1. It’s not about the deficit! Obama’s budget proposal has a deficit of over one trillion dollars. Let’s write it out, $1,000,000,000,000 – wow! Huge! No wonder the House Republicans are upset! So they are fighting hard for $60 billion in cuts, which would leave a deficit of only about one trillion dollars. Hmm . . .

2. It’s not about the deficit! Those most rabid about budget cutting now voted enthusiastically in December for a tax cut package of over $900 billion. (Well, not quite — the most rabid are GOP freshmen, who didn’t get to vote in December because they were not in office yet. Still, the Republican leadership was there, and voted for the tax cuts.) That $900 billion is spread over several years, so defeating the tax cut would not have wiped out the trillion-dollar deficit, but it would have mad a nice dent in it.

3. It’s not about the deficit! We’re fighting wars in Afghanistan (where helicopters just killed 9 boys gathering firewood) and (though our government pretends it’s over) in Iraq. As recent protests in Tunisia, Egypt, Bahrain, Yemen, Libya, Oman, Iran, Morocco, Algeria, Iraq (yes, now that we’ve installed “democracy” there, pro-democracy protests have sprung up, and our “democratic” government is killing them!), and elsewhere have shown, foreign invasion is not the way to democratize a country. I hope they don’t do it in Libya. In any case, really ending these wars is absolutely necessary if we want to get rid of the deficit – yet very few of the deficit hawks are proposing that.

4. It’s not about the deficit! Social security does not contribute to the deficit, yet the majority of the deficit commission wants to cut it, and the Republicans are taking up the cry. (However, keep in mind that the deficit commission never agreed on a report, since there were not enough votes to approve one – so Boehner’s criticism that Obama didn’t follow his own deficit commission is bogus.) Social security does need some adjustment to keep it strong past the middle of the century (how about making the rich pay the tax on their whole income?), but it’s a separate fund. Unless the government diverts social security taxes to pay for other things, cutting social security benefits won’t do anything for the deficit.

5. It’s not about the deficit! Health care costs do contribute to the deficit, yet the deficit-conscious House of Representatives just voted to repeal the national health care law. The law has many flaws, and does not do nearly enough to control health care costs – but it does make a step, and repealing it would increase the deficit.

Conclusion: It’s not about the deficit! The budget cuts the Republicans in Congress are proposing are all based on undermining the ability of government to increase the quality of life for everybody. They will make it harder for anyone but the rich to get an education, eliminate jobs for working people, and make it almost impossible for regulatory agencies to enforce protective laws that are on the books. This is not deficit reduction, it’s class war, another attempt by the upper class to assure that the their profits, dividends, and bonuses are paid for by the rest of us. In Wisconsin, Governor Scott Walker, backed by Republican majorities in the state legislature, is holding the state hostage until his budget bill passes, even though the unions he is trying to destroy have already agreed to all the economic concessions he proposed. The only issue at stake there is the destruction of the unions, part of the destruction of the power of the working class to defend itself. That’s what’s the federal budget battle is about, as well. We should forget about the deficit and pass a budget that creates jobs, lowers the cost of education, protects the environment, and moves us toward a better health care system.

Tax Cuts and the Deficit

It looks like the next big political debate will be about tax cuts. Why the Democrats didn’t want to have this debate before the election is beyond me — it would certainly have helped to make the point that they care about ordinary people. But for whatever reason, they let it go, and now have to try to get a vote in the House of Representatives structured the way they want it.

To put the whole case in a nutshell, what the Democrats want is what the country needs – tax cuts to put more money in the hands of those who 1) need the money, and 2) will spend it. That’s not the rich – they will invest it, and since we are still in the aftermath of a recession, with low consumer demand, it won’t make sense for them to invest it in something productive, making stuff that won’t be bought – so they will invest it in speculation, the stuff that brought on the recession in the first place.

Working people, on the other hand, will use the money to but things, like food, clothing, and housing. Since, again, we are in a period of low demand, that is just what is needed. For once, the Democrats are proposing more or less the right thing.

What what about the deficit? Won’t any tax cut at all make it harder to balance the budget? Yes, but – and this cannot be said too strongly — that is not a problem right now! Ronald Reagan, of all people, used to argue (following the work of economist Arthur Laffer) that cutting taxes would reduce the deficit because it would encourage growth. That didn’t work for Reagan, because he didn’t focus the tax cuts on people who would spend the money. But from the Keynesian point of view, cutting taxes is one way of running a deficit, and it’s really that deficit that is needed to create demand and get the economy growing. We should return to the concept of the”full employment budget” – tax and spending levels that would produce a balanced budget if we had full employment. In times of recession, tax revenues go down and spending (e.g., for unemployment compensation) goes up, while in times of prosperity revenues go up and spending goes down – so a full employment budget will produce deficits in times of recession and surpluses in times of growth, just what we want in the way of fiscal policy.

There are two complicating factors, however. One is that fiscal policy has to be supported by monetary policy. If the Federal Reserve is trying to fight inflation by reducing the money supply, fiscal deficits won’t work — they will put money into the economy through spending, but take it back out by borrowing to cover the deficit. A deficit needs to be combined with what we’re now calling “quantitative easing” – i.e., action by the Fed to create money to finance the deficit. This would be inflationary in the long run — but for the moment that is not a problem, since we are in a period of deflation.

Second, we probably do not have a full employment budget right now due to the ridiculously high level of military spending. This should be cut about 25%, which would solve many problems. Needless to say, getting all US troops out of Afghanistan and Iraq would help a lot with that! But there are plenty of other ways to cut it, as well.

The other problem is that the Republicans control the agenda of the House of Representatives, and have enough votes to support a filibuster in the Senate, and they are insisting that they will only allow a vote on a bill that includes tax cuts for the rich as well as for working people. I have a simple suggestion: the Democrats should offer a series of amendments that would prove irresistibly popular. The first would be what they are proposing now – tax cuts only for those with incomes below $250,000 per year. That’s pretty popular already, but if that fails how about cuts for everyone under half a million a year? A million? Ten million? I’d love to see Congress having to vote on a tax cut only for people with annual incomes over ten million dollars!

They could also propose even higher rates for those at the upper levels. How about a 95% tax on all income over $10,000,000? We had that (with a much lower cutoff) through the early 1950s, and it did not stop growth!

Just a few suggestions — I just hope that Congress, or the progressives in it, find the courage to fight this issue for.