America's economic future is being placed in danger by the
anti-tax, anti-government, debt obsessed rhetoric of many
Republicans and Tea Party advocates. Reducing the national debt is
important but the focus should be on economic growth which will
provide more tax revenue and help reduce the deficit. Focusing
entirely on the debt is self-defeating because cutting government
spending or increasing taxes reduces growth in the short term and
will increase the debt. The focus on spending cuts alone is doubly
dangerous as it will preclude the government from making the
investments needed to turn the economy around. The Republicans keep
referring to tax increases as "job killing", but as an article in
the August 1-7 issue in Bloomberg Businessweek points out,
they are no more "job killing" than spending cuts, probably less
so.
In a recent Washington Post Op Ed, Erich Cantor, the House
majority leader called for lower taxes as a way to stimulate
economic growth. I believe we have tried that with the Bush
tax cuts, over $300 billion in tax cuts in the ARRA legislation,
the recent payroll tax cut, and several other tax cuts such as the
AMT fix, and it has not fixed the problem. All these tax cuts
add up to trillions of dollars over the past 10 years. As a
result of these cuts and the Great Recession, federal revenues as a
share of GDP is less than 15%, the lowest level since 1950. And we
are clearly not overtaxed in this country. Among the 33 OECD
countries, only Mexico and Chile have lower taxes. The idea that we
can cut taxes even further is a dangerous deception that ignores
the reality of the global economy and America's changing
demographics.
Any effort to balance the budget should be a three-legged stool,
budget cuts, tax reform that increases revenues and strengthens the
middle class, and investments in infrastructure and human capital.
Despite Republican assertions that the public opposes tax
increases, polls show that about 2/3 of the public favor a balanced
approach, spending cuts and tax increases to balance the
budget.
In the December 13, 2010 issue of the New Yorker in an article
entitled "Enter the Dragon", John Cassidy points out the state
always played an important role in promoting economic growth and
protecting domestic industries, including in China today. He quotes
Stephen D. King, the chief economist at HSBC , the London-based
global bank, " Western governments have used the methods of state
capitalism for hundreds of years in their bid to shape the world
around them….. The idea that market forces alone led to the West's
success is nonsense." Cassidy concludes, "The greatest danger that
western prosperity now faces isn't posed by the Beijing consensus;
it's posed by the myth of the free markets". Anyone who is a
student of history knows that at the turn of the century when
government had almost no role in the economy, there was little
competition as businesses colluded, fixed prices, and established
monopolies. The economy was much more unstable. According the
National Bureau of Economic research, there was a recession every
4.1 years from 1854 to 1907, the average downturn lasted 22 months,
and was quite severe. Since 1945, which is generally considered the
modern economic era, there has been a recession every 5.5 years
with an average duration of 11 months and generally the recessions
have been less severe.
As Michigan's treasurer from 2006 to 2011, I had a front row
seat for one of the bleakest economic periods faced by any state in
American history. Michigan employment declined for 10 consecutive
years; employment is projected to finally increase in 2011.
As a consequence our revenues declined 32% from FY 2000 to FY 2010
and total state taxes fell from about 8% of personal income to 6%
of personal income. Michigan cut taxes on numerous occasions
beginning in the in the mid-1990s. By 2007, the annual cost of the
tax cuts was nearly $3 billion. We did increase taxes in 2007
because of the sharp decline in revenues but even after the tax
increase the annual cost of the tax cuts was about $2 billion.
All these tax cuts were not able to overcome the effects of
globalization and the downsizing of the domestic auto industry. In
addition, Michigan was forced to cut spending far more than any
other state. From 2001 to 2009, Michigan cut general fund spending
by 13% while the average state increased spending by 30%. Only one
state had a little as a single digit increase in spending. Michigan
also ranked dead last is total spending from own revenue sources,
as spending was flat compared with a 47% increase by the average
state.
Tax cuts that are offset by spending cuts clearly did not work
to stimulate the economy nor will they ever work. The approach of
Michigan's governor, Jennifer Granholm, was to maintain investments
in education, preserve the social safety net, reform state
government spending, and provide incentives for promising,
knowledge based industries such as alternative energy, advanced
manufacturing, homeland security, and -----. This approach
was beginning to pay off as Michigan employment began to increase
in September 2010. However, the new Republican governor despite all
the evidence to the contrary has decided to go back to the
discredited approach by reducing business taxes, cutting education
funding, and raising taxes on the elderly and the poor. These
policies promote even greater income equality and continue the
weakening of the middle class. America cannot have a strong economy
and be a great nation without a strong middle class.
I fear we are headed in the wrong direction and unless we change
course and address the real causes of our economic problems,
unrest, dissension, and mistrust will continue to rise, threatening
our democratic institutions.
