The media continues to direct our attention to deficits and debt as our main problems. Yet, it does little to really highlight the causes of these deficits and debts.
The following two figures from the Center on Budget and Policy Priorities help to clarify the causes. It is important to note that the projections underlying both figures were made before the recent vote making permanent most of the Bush-era tax cuts.
Figure 1 shows the main drivers of our large national deficits: the Bush-era tax cuts, the wars in Iraq and Afghanistan, and our economic crisis and responses to it. Without those drivers our national deficits would have remained quite small.
Figure 2 shows the main drivers of our national debt. Not surprisingly they are the same as the drivers of our deficits.
Significantly, the same political leaders that scream the loudest about our deficits and debt have little to say about stopping the wars or reducing military spending and are the most adamant about maintaining the Bush-era tax cuts. That is because, at root, their interest is in reducing spending on non-security programs rather than reducing the deficit or debt.
Some of these leaders argue that the tax cuts will help correct our economic problems and thereby help reduce the deficit and debt. However, multiple studies have shown that tax cuts are among the least effective ways to stimulate employment and growth. In contrast, the most effective are sustained and targeted government efforts to refashion economic activity by spending on green conversion, infrastructure, health care, education and the like.
While Republicans and Democrats debate the extent to which taxes should be raised, both sides appear to agree on the need to rein in federal government spending in order to achieve deficit reduction. In fact, federal government spending has been declining both absolutely and, as the following figure from the St. Louis Federal Reserve shows, as a share of GDP.
In reality, our main challenge is not reducing our deficit or debt but rather strengthening our economy, and cutting government spending is not going to help us overcome that challenge. As Peter Coy, writing in BusinessWeek explains:
It pains deficit hawks to hear this, but ever since the 2008 financial crisis, government red ink has been an elixir for the U.S. economy. After the crisis, households strove to pay down debt and businesses hoarded profits while skimping on investment. If the federal government had tried to run balanced budgets, there would have been an enormous economy wide deficit of demand and the economic slump would have been far worse. In 2009 fiscal policy added about 2.7 percentage points to what the economy’s growth rate would have been, according to calculations by Mark Zandi of Moody’s Analytics. But since then the U.S. has underutilized fiscal policy as a recession-fighting tool. The economic boost dropped to just half a percentage point in 2010. Fiscal policy subtracted from growth in 2011 and 2012 and will do so again in 2013, to the tune of about 1 percentage point, Zandi estimates.
If we were serious about tackling our economic problems we would raise tax rates and close tax loopholes on the wealthy and corporations and reduce military spending, and then use a significant portion of the revenue generated to fund a meaningful government stimulus program. That would be a win-win proposition as far as the economy and budget is concerned.
Considering the enormous time spent debating tax policy, it is easy to imagine that the U.S. must have one of the high tax rates in the world. Well, that is not the case.
The Atlantic has a great post which includes Business Insidergraphs drawn from a KPMG report on global tax rates.
Here is one of them. It shows the personal tax rate paid by people making the equivalent of $100,000 a year in 2012. The U.S. is the 55th ranked country out of 114 in terms of tax rates.
The next graph shows the same thing but for those earning the equivalent of $300,000 a year. The U.S. ranking is similar for this upper income group, 53rd highest out of 114.
Moreover, as Derek Thompson, the author of the Atlantic post, notes:
But these numbers might understate how low taxes have been in the U.S. Unlike most advanced economies, the U.S. don’t supplement personal income taxes with a national sales tax, or value-added tax (VAT). Consumption taxes accounted for about a fifth of total U.S. revenue in 2008 (mostly at the state and local level) compared to an OECD average of 32 percent. In other words, the U.S. relies uniquely on personal tax rates to raise revenue — and we have relatively low personal tax rates.
Finally, here is a look at the U.S. ranking among OECD countries for taxes as a share of GDP in 2008.
So, given that the U.S. doesn’t seem to be a high-tax rate country, why is tax policy so contentious? No doubt the answer has a lot to do with who actually pays the taxes and, perhaps even more importantly, what the revenue is used for.
Many expected that the severity of the Great Recession, a recognition that prior expansion was largely based on unsustainable “bubbles,” and an anemic post-crisis recovery, would lead to serious discussion about the need to transform our economy. Yet, it hasn’t happened.
One important reason is that not everyone has experienced the Great Recession and its aftermath the same. Jordan Weissmann, writing in the Atlantic, published a figure from the work of Edward Wolff. The charts shows the rise and fall of median and mean net worth among Americans: how much one owns (e.g., savings, investments, and property) minus how much one owes (e.g., credit card debt and outstanding loans).
Both the mean and the median are interesting because, while they’re both measures of central tendency, one is more sensitive to extremes than the other. The mean is the statistical average (literally, all the numbers added up and divided by the number of numbers), so it is influenced by very low and very high numbers. The median, in contrast is, literally, the number in the middle of the sample of numbers. So, if there are very high or low numbers, their status as outliers doesn’t shape the measure.
Back to the figure: as of 2010, median household net worth (dark purple) had fallen back to levels last seen in the early 1960s. In contrast, mean household net worth (light purple) had only retreated to the 2000s. This shows that a small number of outliers — the very, very rich — have weathered the Great Recession much better than the rest of us.
The great disparity between median and mean wealth declines is a reflection of the ability of those at the top of the wealth distribution to maintain most of their past gains. And the lack of discussion about the need for change in our economic system is largely a reflection of the ability of those very same people to influence our political leaders and shape our policy choices.
…for all the popular wisdom that programs to help low-income people are swallowing the economy, the truth is that like so much else that plagues our fiscal future, it’s all about health care spending. The figure shows that as a share of GDP, prior to the Great Recession, non-health care spending was cruising along at around 1.5% for decades. It was Medicaid/CHIP (Medicaid expansion for kids) that did most of the growing.
Regardless, the recent explosion in the ratio of Medicare/CHIP spending to GDP is largely due to the severity of the Great Recession, not the generosity of the programs. The recession increased poverty and thus eligibility for the programs, thereby pushing up the numerator, while simultaneously lowering GDP, the denominator. Moreover, spending on all non-health care safety net programs is on course to dramatically decline as a share of GDP. Even Medicare/Chip spending is projected to stabilize as a share of GDP.
These programs are essential given the poor performance of the economy, and in most cases poorly-funded. Cutting their budgets will not only deny people access to health care, housing, education, and food, it will also further weaken the economy, in both the short and long run.
The following two charts taken from a Center for Economic Policy and Research Center study by John Schmitt and Janelle Jones highlight the distressed nature of the U.S. labor market and the need for raising the minimum wage and strengthening union organizing.
Schmitt and Jones define low wage work as that work paying $10.00 an hour or less in 2011 dollars. As the charts show, low wage workers are far more educated and older in 2011 than in 1979.
Education and experience are not sufficient to ensure a living wage.
Not surprisingly, growing numbers of low wage workers at Walmart and at chain fast food restaurants have begun engaging in direct action for higher wages and better working conditions. They deserve our support.
With the election over, the news is now focused, somewhat hysterically, on the threat of the fiscal cliff.
The fiscal cliff refers to the fact that at the end of this calendar year several temporary tax cuts are scheduled to expire (including those that lowered rates on income and capital gains as well as payroll taxes) and early in the next year spending cuts are scheduled for military and non-military federal programs. See here for details on the taxes and programs.
Most analysts agree that if tax rates rise and federal spending is cut the result will be a significant contraction in aggregate demand, pushing the U.S. economy into recession in 2013.
The U.S. economy is already losing steam. GDP growth in the second half of 2009, which marked the start of the recovery, averaged 2.7% on an annualized basis. GDP growth in 2010 was a lower 2.4%. GDP growth in 2011 averaged a still lower 2.0%. And growth in the first half of this year declined again, to an annualized rate of 1.8%.
With banks unwilling to loan, businesses unwilling to invest or hire, and government spending already on the decline, there can be little doubt that a further fiscal tightening will indeed mean recession.
So, assuming we don’t want to go over the fiscal cliff, what are our choices?
Both Republicans and Democrats face this moment in agreement that our national deficits and debt are out of control and must be reduced regardless of the consequences for overall economic activity. What they disagree on is how best to achieve the reduction. Most Republicans argue that we should renew the existing tax cuts and protect the military budget. Deficit reduction should come from slashing the non-military discretionary portion of the budget, which, as Ethan Pollack explains, includes:
…safety net programs like housing vouchers and nutrition assistance for women and infants; most of the funding for the enforcement of consumer protection, environmental protection, and financial regulation; and practically all of the federal government’s civilian public investments, such as infrastructure, education, training, and research and development.
The table below shows the various programs/budgets that make up the non-security discretionary budget and their relative size. The chart that follows shows how spending on this part of the budget is already under attack by both Democrats and Republicans.
Unfortunately, the Democrat’s response to the fiscal cliff is only marginally better than that of the Republicans. President Obama also wants to shrink the deficit and national debt, but in “a more balanced way.” He wants both tax increases and spending cuts. He is on record seeking $4 trillion in deficit reduction over a ten year period, with a ratio of $2.50 in spending cuts for every $1 in new revenue.
The additional revenue in his plan will come from allowing tax cuts for the wealthy to expire, raising the tax rate on the top income tax bracket, and limiting the value of tax deductions. While an important improvement, President Obama is also committed to significant cuts in non-military discretionary spending. Although his cuts would not be as great as those advocated by the Republicans, reducing spending on most of the targeted programs makes little social or economic sense given current economic conditions.
So, how do we scale the fiscal cliff in a responsible way?
We need to start with the understanding that we do not face a serious national deficit or debt problem. As Jamie Galbraith notes:
…is there a looming crisis of debt or deficits, such that sacrifices in general are necessary? No, there is not. Not in the short run — as almost everyone agrees. But also: not in the long run. What we have are computer projections, based on arbitrary — and in fact capricious — assumptions. But even the computer projections no longer show much of a crisis. CBO has adjusted its interest rate forecast, and even under its “alternative fiscal scenario” the debt/GDP ratio now stabilizes after a few years.
Actually, as the chart below shows, the deficit is already rapidly falling. In fact, the decline in government spending over the last few years is likely one of the reasons why our economic growth is slowing so dramatically.
From fiscal 2009 to fiscal 2012, the deficit shrank 3.1 percentage points, from 10.1% to 7.0% of GDP. That’s just a bit faster than the 3.0 percentage point deficit improvement from 1995 to ’98, but at that point, the economy had everything going for it.
Other occasions when the federal deficit contracted by much more than 1 percentage point a year have coincided with recession. Some examples include 1937, 1960 and 1969.
In short, we do not face a serious problem of growing government deficits. Rather the problem is one of too fast a reduction in the deficit in light of our slowing economy.
As to the challenge of the fiscal cliff — here we have to recognize, as Josh Bivens and Andrew Fieldhouse explain, that:
…the budget impact and the economic impactare not necessarily the same. Some policies that are expensive in budgetary terms have only modest economic impacts (for example, the 2001 and 2003 tax cuts aimed at high-income households are costly but do not have much economic impact). Conversely, other policies with small budgetary costs have big economic impacts (for example, extended unemployment insurance benefits).
In other words, we should indeed allow the temporary tax rate deductions for the wealthy to expire, on both income and capital gains taxes. These deductions cost us dearly on the budget side without adding much on the economic side. As shown here and here, the evidence is strong that the only thing produced by lowering taxes on the wealthy is greater income inequality.
Letting existing tax rates rise for individuals making over $200,000 and families making over $250,000 a year, raising the top income tax bracket for both couples and singles that make more than $388,350, and limiting tax deductions will generate close to $1.5 trillion dollars over ten years as highlighted below in a Wall Street Journal graphic .
However, in contrast to President Obama’s proposal, we should also support the planned $500 billion in cuts to the military budget. We don’t need the new weapons and studies are clear that spending on the military (as well as tax cuts) is a poor way to generate jobs. For example, the table below shows the employment effects of spending $1 billion on the military versus spending the same amount on education, health care, clean energy, or tax cuts.
And, we should also oppose any cuts in our non-security discretionary budget. Instead, we should take at least half the savings from the higher tax revenues and military spending cuts — that would be a minimum of $1 trillion — and spend it on programs designed to boost our physical and social infrastructure. Here I have in mind retrofitting buildings, improving our mass transit systems, increasing our development and use of safe and renewable energy sources like wind and solar, and expanding and strengthening our social services, including education, health care, libraries, and the like.
Our goal should be a strong and accountable public sector, good jobs for all, and healthy communities, not debt reduction. The above policy begins to move us in the right direction.
There is growing talk that the economy is finally on its way to recovery — “A Steady, Slo-Mo Recovery” — in the words of Businessweek.
Here is how Peter Coy, writing in Businessweek, explains the growing consensus:
Job growth is poised to continue increasing tax revenue, which will make it easier to shrink the budget deficit while keeping taxes low and preserving essential spending. All this will occur without any magic emanating from the Oval Office. It would have occurred if Mitt Romney had been elected president. “The economy’s operating well below potential, and there’s a lot of room for growth” regardless of who’s in office, says Mark Zandi, chief economist of forecaster Moody’s Analytics.
Something could still go wrong, but the median prediction of 37 economists surveyed by Blue Chip Economic Indicators is that during the next four years, economic growth will gather momentum as jobless people go back to work and unused machinery is put back into service. “The self-correcting forces in the economy will prevail,” predicts Ben Herzon, senior economist at Macroeconomic Advisers, a forecasting firm in St. Louis.
Before we get lulled to sleep, we need some perspective about the challenges ahead. How about this: we face a 9 million jobs gap between the number of jobs we have and the number we need, and this doesn’t even address the low quality of the jobs being created.
The chart below, taken from an Economic Policy Institute blog post, illustrates the gap.
As Heidi Shierholz, the author of the post, explains:
The labor market has added nearly 5 million jobs since the post-Great Recession low in Feb. 2010. Because of the historic job loss of the Great Recession, however, the labor market still has 3.8 million fewer jobs than it had before the recession began in Dec. 2007. Furthermore, because the potential labor force grows as the population expands, in the nearly five years since the recession started we should have added 5.2 million jobs just to keep the unemployment rate stable. Putting these numbers together means the current gap in the labor market is 9.0 million jobs. To put that number in context: filling the 9 million jobs gap in three years — by fall 2015 — while still keeping up with the growth in the potential labor force, would require adding around 330,000 jobs every single month between now and then.
Unfortunately, our “job creators” only created 171,000 net jobs in October. And that was considered a relatively good month. The chart below, from the Center on Budget and Policy Priorities, gives a sense of what we are up against.
Of course, weak job growth in the past doesn’t mean that we cannot have strong job growth in the future. On the other hand, such a change would require consensus on radically different policies than those currently being discussed and debated by those in power.
Market advocates have had their way for years now and one of the consequences has been the growing dominance of industry after industry by a select few powerful corporations. In short, unchecked competition can and does produce its opposite: monopoly.
As John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna explain:
This [development] is anything but an academic concern. The economic defense of capitalism is premised on the ubiquity of competitive markets, providing for the rational allocation of scarce resources and justifying the existing distribution of incomes. The political defense of capitalism is that economic power is diffuse and cannot be aggregated in such a manner as to have undue influence over the democratic state. Both of these core claims for capitalism are demolished if monopoly, rather than competition, is the rule.
The chart below highlights the rise, especially since the 1980s, in both the number and percentage of U.S. manufacturing industries in which four firms account for more than 50% of sales.
Number and Percentage of U.S. Manufacturing Industries in which Largest Four Companies Accounted for at Least 50 Percent of Shipment Value in Their Industries, 1947-2007:
As the table below shows, the concentration of market power is not confined to manufacturing.
Percentage of Sales for Four Largest Firms in Selected U.S. Retail Industries:
Industry (NAICS code)
Food & beverage stores (445)
Health & personal care stores (446)
General merchandise stores (452)
Book stores (451211)
Computer & software stores (443120)
As impressive as these concentration trends may be, they actually understate the market power exercised by leading U.S. firms because many of these firms are conglomerates and active in more than one industry. The next chart provides some flavor for overall concentration trends by showing the growing share of total business revenue captured by the top two hundred U.S. corporations. Notice the sharp rise since the 1990s.
Revenue of Top 200 U.S. Corporations as Percentage of Total Business Revenue, U.S. Economy, 1950–2008:
These are general trends. Here, thanks to Zocalo (which draws on the work of Barry Lynn), we get a picture of the market dominance of just one corporation–Procter and Gamble. This corporation controls:
More than 75 percent of men’s razors
About 60 percent of laundry detergent
Nearly 60 percent of dishwasher detergent
More than 50 percent of feminine pads
About 50 percent of toothbrushes
Nearly 50 percent of batteries
Nearly 45 percent of paper towels, just through the Bounty brand
Nearly 40 percent of toothpaste
Nearly 40 percent of over-the-counter heartburn medicines
Nearly 40 percent of diapers.
About 33 percent of shampoo, coffee, and toilet paper
A recent Huffington Post blog post, which includes the following infographic from the French blog Convergence Alimentaire, makes clear that Procter and Gamble, as big as it is, is just one member of a small but powerful group of multinationals that dominate many consumer markets. The blog post states: “A ginormous number of brands are controlled by just 10 multinationals… Now we can see just how many products are owned by Kraft, Coca-Cola, General Mills, Kellogg’s, Mars, Unilever, Johnson & Johnson, P&G and Nestlé. ” See here for a bigger version of the infographic.
And, it is not just the consumer goods industry that’s highly concentrated. As the Huffington Post also noted: “Ninety percent of the media is now controlled by just six companies, down from 50 in 1983…. Likewise, 37 banks merged to become JPMorgan Chase, Bank of America, Wells Fargo and CitiGroup in a little over two decades, as seen in this 2010 graphic from Mother Jones.”
Not surprisingly, there are complex interactions and struggles between these dominant companies. Unfortunately, most end up strengthening monopoly power at the public expense. For example, as Zocalo reports, Wal-Mart, Target, and other major retailers have adopted a new control strategy in which:
…these retailers name a single supplier to serve as a category captain. This supplier is expected to manage all the shelving and marketing decisions for an entire family of products, such as dental care.
The retailer then requires all the other producers of this class of products — these days, usually no more than one or two other firms — to cooperate with the captain. The consciously intended result of this tight cartelization is a growing specialization of production and pricing among the few big suppliers who are still in business…
It’s not that Wal-Mart and category copycats like Target cede all control over shelving and hence production decisions to these captains. The trading firms use the process mainly to gain more insight into the operations of the manufacturers and hence more leverage over them, their suppliers, and even their other clients… Wal-Mart, for instance, has told Coca-Cola what artificial sweetener to use in a diet soda, it has told Disney what scenes to cut from a DVD, it has told Levi’s what grade of cotton to use in its jeans, and it has told lawn mower makers what grade of steel to buy.
And don’t think that such consolidation within the Wal-Mart system makes it easier for new small manufacturers and retailers to rise up and compete. The exact opposite tends to be true. . . . This [system] boils down to presenting the owners of midsized and smaller companies, like Oakley or Tom’s of Maine, with the “option” of selling their business to the monopolist in exchange for a “reasonable” sum determined by the monopolist.
This was the message delivered to many of the companies that in recent decades managed to develop big businesses seemingly outside the reach of the Procter & Gambles, Krafts, and Gillettes of the world. Consider the following:
Ben & Jerry’s, the Vermont ice cream company that reshaped the industry, was swallowed by Unilever in 2000.
Cascadian Farm, one of the most successful organic food companies, sold out to General Mills and was promptly transformed into what its founder calls a “PR farm.”
Stonyfield Farm and Brown Cow, organic dairy companies from New Hampshire and California, respectively, separately sold con-trol to the French food giant Groupe Danone in February 2003 and were blended into a single operation.
Glaceau, the company behind the brightly colored Vitamin Water and one of the last independent success stories, sold out to Coca-Cola in 2007.
The practical result is a hierarchy of power in which a few immense trading companies — in control of and to some degree in cahoots with a few dominant supply conglomerates — govern almost all the industrial activities on which we depend, and they back their efforts with what amounts to police power. This tiny confederation of private corporate governments determines who wins and who loses in this country, at least within our consumer economy.
Of course the growing concentration nationally is matched by a growing concentration of power globally, with large transnational corporations from different nations battling each other and, in many cases, uniting through mergers and acquisitions. We cannot hope to understand and overcome our current problems and the structural pressures limiting our responses to them without first acknowledging the extent of corporate dominance over our economic lives.