Illusory Thinking

"We need to make tax cuts permanent, and we need to make a commitment that there'll be no new taxes," Mr. McCain said. "We need to cut payroll taxes. We need to cut business taxes."

It is, and always has been, illusory to think that the GOP would forgo playing politics, join the ranks of the economically sane and sign on to the American Recovery and Reinvestment Act as currently hammered out in negotiations between the President's economic team and the leadership in the Congress. The only thing more illusory is their adherence to the belief that tax cuts work as an economic stimulus. But at least their views are now clearly stated and I suspect that should please the President for he can and should now just ignore the recalcitrant wing of the GOP, or put another way, all but a handful of them. The bankruptcy of GOP economic thought should now be plainly evident and that's a case the President can make directly to the American people.

"Right now, given the concerns that we have over the size of this package and all of the spending in this package, we don't think it's going to work," the House Minority Leader John A. Boehner, Republican of Ohio, said on NBC's "Meet the Press.""And so if it's the plan that I see today, put me down in the no column."

Actually, it's more like the irrelevant column. The Congressman from Ohio can pout all he will, the Senator from Arizona can rant and rave all he wants and it won't change the fact that tax cuts have been an abysmal failure in lifting the economy. The GOP's main contention has been now for over 30 years that by reducing the top tax rate on personal and corporate income that a large increase in aggregate total savings would result. Yet the savings rate of American households has been declining for more than a decade and it now stands at the lowest level of the post-WW II era. Since 2003, the combined annual net savings of households, businesses, and government have declined to about one percent of gross national income. So if increasing the savings rate is the goal so as to thus increase investment, cutting taxes hasn't worked.

And yet the GOP continues to pitch the idea that tax cuts lift the economy. Well, the Democrats are batting now and they shouldn't swing at balls outside the strike zone. To continue the metaphor, this is the GOP's set up pitch. They want the stimulus to fail and they know full well that the gravity of the situation portends an extended economic downturn that they will look to blame increasingly on the Democrats on the hope that Americans have short memories when it comes to assigning blame. That's their game plan. They want the President and the Democrats to strike out. Tax cuts pacifies their base but not ours and doubly does next to nothing when it comes to lifting the economy. For them, it's a win-win. But it's a lose-lose for the American people.

The reality is the tax cutting regimen has been a race to the bottom for most Americans. The top 300,000 Americans collectively now enjoy almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980 and equaling levels not seen since just before the onset of the Great Depression. Earlier this year, Citizens for Tax Justice released a report finding that 70 percent of the benefits of the capital gains and dividends loopholes will go to the richest 1 percent of taxpayers in 2009. Same as it ever was for the GOP. The game is the same as always, starve the government of funds and you might just prevent a national health care system. It's time for a different course.

It's actually prescient that Congressman Boehner and Senator McCain spoke out now for almost none of the economic news this coming week is expected to be positive. And all of this economic woe is on the GOP. Look no further than Republican tax cuts, Republican deficit spending, Republican gross misinvestment, and the wholesale assault on the industrial manufacturing capacity of the United States for the cause of our current state. We, as a nation, manufacture less today than we did in 1980. Talk about an accomplishment, or lack thereof.

Here's a preview of the bad news to come this week from Market Watch:

Almost everything that could have gone wrong did after the credit crisis worsened in September.

More than 1.5 million jobs were destroyed in the quarter. Consumer spending fell again. Businesses put investment plans on hold. Home builders threw in the towel. Export markets dried up.
The only bright spot was the collapse in prices for oil and other commodities, a sudden reversal caused directly by the global slump. This has boosted consumers' spending power, but has also slammed corporate profits.

"The weakness was very widespread, with every type of final expenditure falling," wrote economist Michael Feroli of J.P. Morgan, who expects final sales to fall 5.9% annualized, which would be the third worst quarter since 1949.

According to Feroli's estimates, consumer spending likely declined at a 3.6% annual pace, about the same as the 3.8% drop in the third quarter. Business investment probably declined at a 20% pace, while residential investment plunged at a 30% pace, the worst yet in this episode. He expects nonresidential construction to fall 2%, the first decline in about three years, with bigger drops to come. And net exports are expected to fall, a big turnaround from earlier in the year when exports kept the economy above water.

The only positive contributors to GDP are expected to be government spending and inventories.

The nation faces some very tough choices in coming years as a result of 30 years of misguided Reagan era neo-liberal and supply-side economic policies that have led us to this juncture. That an increasingly large share of the income gains has gone to the top one percent of Americans with very little to show for a wider economic gain for the bottom 50% of Americans should, at the very least, raise serious questions not just about the nature of fairness in America but also about the GOP's economic stewardship these past three decades. Despite the clear economic failure of their ideas, the GOP continues to trot out the same old illusory thinking. It's time the President calls them on it.

Quotes used in this post are courtesy of the New York Times.

Tags: American Recovery and Reinvestment Act, GOP, Neo-liberalism, Rep. John Boehner, Senator John McCain, Supply-side Economics, US Economy (all tags)

Comments

12 Comments

Why are taxes the answer for everything?!?!

You talk about "investments" as if that equates to savings rates.  When I "invest" in something, I'm not saving money.  I'm buying something, such as shares in a company on the bet (or hope, lol) that this company will continue to grow and prosper, and hence, provide me with a profit on my investment.  

This is a consumer-based economy.  If anything, Americans are now hoarding their money out of a very rational fear of the unknown.  So in essence, their "saving" money is the root of our current crisis.  People aren't spending anymore, or have dramatically cut down.   When people don't spend (which is actually tantamount to saving), products and services go unsold.  Since the demand has diminished, the profits turn to losses.  Losses turn to workforce reductions.  And the cycle goes on and on until something psychologically changes in the zeitgeist.

And now we find that states and localities can no longer afford the ridiculously large social teat that's been created that has -in most cases- ZERO accountability.  But the programs sure got people reelected, no?  And what's to pay for this?  Taxes, taxes, and yet more taxes.  

Anyone who lives in the northeast like I do knows the exorbitantly heavy burden taxes place on individuals.  It's totally out of control.  I don't want to hear word one about new freakin taxes.  Enough.  

When did the Democratic party equate to a Socialist party?  As bad as unfettered capitalism is (and I agree that we've seen too many examples of such), this notion that hard work, talent, and fortitude needs to be penalized in some way to make things "fair" is pathetic.  To demonize every person who's made something of themselves from their own devices is just not right.  It provides an incredible disincentive for people to succeed.  Why?  Come on, it's simple human nature.  If I know I'm going to have to pay a disproportionate amount of my income after toiling away when others couldn't be bothered to put in the time, why would I?  It's pointless.

We definitely need much more stringent regulations on institutions that deal with money; our money.  There's no argument there.   But to rely on taxes as the panacea for all that ails America?  That's a solution I can't abide.  Trust me; I'm far from being alone on this.

by DaTruth 2009-01-26 03:41AM | 0 recs
Re: Why are taxes the answer for everything?!?!

Individual tax rates in the United States are extraordinarily low.  I have no idea how you can argue to the contrary.  Is there a point beyond which taxes really do inhibit economic growth?  Absolutely.  But we are nowhere near that point right now, so your rhetoric about punishing "hard work, talent, and fortitude" merely sounds like Republican propoganda.  Especially since I don't know any democrats that want to raise taxes on folks making less than 250,000/year.  

I would also add that as someone who will likely have my taxes raised if the Bush tax cuts expire, I don't feel "demonized" in the least.  Our highest tax bracket is reasonable and I'm happy to pay my share.

by HSTruman 2009-01-26 04:24AM | 0 recs
Excuse me?

You seem to have it ass backwards. The Repiglicans and their sycophants are akin to a one trick pony. Their answer to every problem is CUT TAXES! They have systematically shifted the Tax burden from their base (The wealthy) on to the middle class. They have driven this country into ruin with un-precedented debt! At the same time have spent and borrowed wildly whilst blaming every problem they created on liberals and taxes. When we re-learn that taxation is the essence of civilization and shift back to a balanced tax system where the rich and the Corporations pay a balanced tax rate where they feel the same burden as compared to the average wage earner. Then our appreciation for taxes and all the things they provide to us will be understood, accepted and appreciated.

by eddieb 2009-01-26 04:37AM | 0 recs
Re: Excuse me?

You're right about the Republican one-trick pony.

by spirowasright 2009-01-26 10:09AM | 0 recs
Re: Why are taxes the answer for everything?!?!

I don't agree that the hoarding of money is the root of this crisis. What about the housing bubble, the subsequent subprime crisis and collapsing CDOs? Credit Crunch? Deregulation? So I'd rather say the crisis was in part caused by spending (over years) of money which wasn't adequately covered.

As for high tax rates, the Individual Tax Rate Survey 2008 by KPMG (see http://www.kpmg.ch/mediareleases/8579.ht m) gives a picture which is a bit more balanced. The individual tax rate of the US is put at 35% max.. That is above the average of their study of 28.8%, yet still comparatively low (see page 11 for a comparision of OECD states). So I think a strong focus on taxes is misguided in the current situation.

- Arg

PS: Oh, and Charles Lemos, I really enjoy your addition to the the MyDD team, you're doing a great job at widening this site's scope.

by argovia 2009-01-26 12:15PM | 0 recs
Re: Why are taxes the answer for everything?!?!

Thanks, I appreciate your kind words.

by Charles Lemos 2009-01-26 05:27PM | 0 recs
Re: Why are taxes the answer for everything?!?!

The definition of savings is everything not consumed. Investments are a use of savings.

The Democratic Party is a "Big Tent" party that runs across the ideological spectrum.

I am sure that we will continue this conservation on other threads and I hope to convince you that fairness in America matters for a variety of reasons from moral to self-interested economics.

by Charles Lemos 2009-01-26 06:56PM | 0 recs
Re: Illusory Thinking


Well, the Democrats are batting now and they shouldn't swing at balls outside the strike zone. To continue the metaphor, this is the GOP's set up pitch. They want the stimulus to fail

Concentrating wealth doesn't work as a policy. This combination of concentrating wealth and beggaring the next generation has proven popular, now it has run the nation into the ground. Hopefully the Dems will start leading us out of this.

by redwagon 2009-01-26 04:27AM | 0 recs
Don't stop there

Right-wing policies didn't just fail to encourage savings, they decoupled savings from any useful investment in the economy by deregulating the markets.  As a result, I'm not sure you should consider higher savings a necessarily good thing, since money poured into secondary stock markets, much less nth order derivatives, doesn't just fail to capitalize growth, it actually fosters economic weapons of mass desruction as it pyramids itself into exploding bubbles.

What we need is truly confiscatory taxation on earnings (from all sources) beyond what is at all likely to be used for consumption.  Then we need to collect back taxes by actually confiscating the estates of the wealthy, I mean what little is left after the bubbles have burst and destroyed most of their accumulated ill-gotten gains.

by gtomkins 2009-01-26 05:58AM | 0 recs
we need to put you and DaTruth in a room...

And let you two polar opposites fight it out...

Oh, and this statement "Then we need to collect back taxes by actually confiscating the estates of the wealthy" I alway suspect someone from the right is just looking to bait lefties.

We need a little revolution, tis true, but this is hardly March of 1917....

by WashStateBlue 2009-01-26 06:56AM | 0 recs
Re: we need to put you and DaTruth in a room...

You're right it's not March 1917, more like the Spring of 1873.

by Charles Lemos 2009-01-26 05:29PM | 0 recs
The GOP's problem

is that they've never gotten over Reagan. Instead of looking for new, relevant solutions, they just keep running the Gipper's playbook.

Weren't the highest post-war tax brackets something like 96%? Yeah, make an argument that 96% is too high, or even 70% (as under Carter), and I'll buy it. Unfortunately the GOP seemed to infer that if cutting taxes once was good, continuing to cut taxes forever is even better. It's become a mantra instead of a policy.

by Neef 2009-01-26 08:11AM | 0 recs

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