The Deficit – One Big Hoax (Part IV)

I wrote the following a few days ago. The days are now counting down, and what has been unthinkable to most has now become almost inevitable. The consequences are almost too hard to imagine. If it happens, interest rates will go up by at least 1% causing the deficit to increase by another trillion over ten years. So much for those who claim to be concerned about the deficit.

The media seems to have forgotten that Speaker Boehner actually had reached an agreement to cut four trillion from the deficit with the President weeks ago. He then consulted his caucus and came back and said it couldn’t pass. No one seems to have questioned that claim. But it is almost surely untrue. What he was reporting was that a majority of the Republican caucus would not go along. It is almost a certainty that if he had decided to put it to a vote, it would have passed, mostly with Democratic votes, but with enough Republican votes to make a majority if the speaker had put his effort behind it.

It would have meant that he would have lost his speakership and maybe his seat, but he would have saved the country. Whatever happened to “Country First?”

As I indicated in my posts "The Deficit – One Big Hoax (Part I)," "The Deficit – One Big Hoax (Part II)" and "The Deficit – One Big Hoax (Part III)," the Bush Administration with the active support and connivance of his Republican Congress, set out to create as big a deficit as they possibly could, and taking a surplus in excess of 200 billion dollars, and projected surpluses so great, that many, including then Fed Chairman Greenspan, predicted that all of the national debt would be wiped out before long. In fact, as New Economic Perspectives wrote:

...on June 29, 1999 the Wall Street Journal ran two long articles, one boasting that government surpluses would wipe out the national debt and add to national saving...

It was argued that wiping out the National debt would be a disaster and steps must be taken to prevent this. This was the argument used to justify the huge tax cuts, which were originally intended to be permanent, but when the CBO (Congressional Budget Office) projected the results of these cuts beyond 10 years, the deficit became so large that it was concluded that it couldn’t be sold. For that reason it was passed with a 10 year sunset provision, but with the intent that after the ten years arguments would be found to make them permanent, which is exactly where we are now.

But as the Bush Administration continued, it became apparent that tax cutting was not the end all because spending accelerated as well. Not only were we spending huge amounts on the war in Iraq, but with huge increases in Defense spending. In addition the Bush Administration, with the support of Republicans in the Congress, actually added to the benefits given by Medicare in the form of Part D, which would for the first time cover pharmaceuticals, adding greatly to the deficit within the Medicare architecture. At that time I remember writing to a friend that I thought that this was a deliberate plan to make it unsustainable.

I arrived at this conclusion because I was aware that the Americans for Tax Reform, headed by Grover Norquist, which was dominating Republican policy had summarized his view with the now famous quote:

I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.

In pursuit of this goal he has pressured almost every single Republican, not only in Congress but at all levels of government to sign a pledge reading:

“I, _____, pledge to the taxpayers of the (____ district of the) state of ______ and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rate for individuals and business; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

It is interesting to note that this refers only to income taxes, but what is the Club’s position on the Capital Gains tax?:

Rather than increasing the Capital Gains tax...Congress should instead be looking at reducing it. Preferably to zero.

Or let us look at the policies advocated by the Club for Growth:

A flat tax, but until that can be obtained it recommends:

-Permanently extend the reduced income tax rates set to expire at the end of 2010.
-Lower or eliminate the dividend tax rate.
-Lower or eliminate the individual capital gains tax rate.
-Lower or eliminate the corporate income tax rate

While this clearly indicates a desire to eliminate the progressive nature of the income tax and to put the whole tax burden on those who earn their living by working, it hides a much more insidious objective. Since any tax that lower income earners could pay would of necessity have to be quite low, and since according to National Taxpayers Union, the bulk of income taxes are paid by the top 50% of earners who pay 97.30% of all Federal Personal Income Tax paid, and according to the Heritage Foundation “The Top 10 Percent of Earners Paid 70 Percent of Federal Income… while the bottom 50% paid only 3%” (they don’t say where the remaining 27% comes from) and since the top tax rate in the US at present is 35%, a flat tax of let us say 10% would reduce total tax receipts by well over 50%, making it impossible for the government to fund much more than the military. I suggest that is exactly what is intended, not simply to spare the rich from paying taxes.

Or to return to the oft-quoted statement of by Grover Norquist, "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

That is exactly what these policy prescriptions would accomplish and what is intended.

(In case the reader is wondering why the top 10 percent of earners pay 70% of federal income taxes, allow me to point out that in 2006, which are the latest figures available, the top 20% of earners in the US earned 61% of all income and the top 1% earned 21.3%. Even if we had a completely flat income tax 61% of the tax would be paid by the top 20%. Wealth is skewed even worse, with the top 1% owning almost 35% of all wealth in the US and the rest or 99% combined owning only a little over 65%. See here, which is well worth reading.)

Some might ask why anyone would want so much money, should remember that wealth is power, and no human has ever had enough power. Furthermore, the acquisition of wealth is part of a game or sport, and its ever-greater acquisition is winning the game.

In my next post on this subject, I will address why in this recession raising taxes on the rich will not hurt the economy, while reducing spending will, which is the opposite of what Republicans and our media is telling us.

Roosevelt and the Great Depression

On March 3, 2009 I distributed my commentary entitled, “The Stimulus Bill,” which is posted here.

I concluded with, “they are now even going so far as to rewrite the history of the Roosevelt New Deal. Now we hear that the New Deal was totally ineffective and that it was only World War II that saved the economy.

Thus the Right Wing, Heritage Foundation, published an article on its web-site on January 9, 2009 entitled, “More federal spending: New deal or raw deal?” They then published a graph issued by the Department of Commerce, which I reproduce below: The amazing thing is that anybody who takes the time to actually examine the graph will quickly see that the graph proves the opposite. The graph shows the unemployment rate between the years 1926 to 1947.



In ’26 it was a spectacular 2.5% but then it starts to inch up as the economy slows. By ’28 it is up to over 5%. By the time Roosevelt is inaugurated on March 4, 1933 it has peaked at 35.5%. Roosevelt starts his New Deal and unemployment starts to drop steadily until it gets to just above 20% in 1937, a drop of 15% or a cut in the rate of unemployment of almost 50%. It may not have brought us back to the boom year of ’28 but to minimize this achievement is the height of ignominy.

But despite these successes, Roosevelt was inherently in sympathy with conservative orthodoxy and in the ’37 election ran on a platform of balancing the budget.

Social Security taxes were just beginning to be collected; veterans' bonus payments ended. The Federal Reserve Board raised reserve requirements and supported the Department of the Treasury's advocacy of a cutback in federal expenditures to help achieve a balanced budget for 1938.

These policies choked the frail recovery and by August the economy was showing signs of recession. See here.

In fact this departure by Roosevelt of Keynesian economics caused an exasperated John Maynard Keynes to write the president, urging him to abandon his platform of balancing the budget and raising taxes. See here. In other words to the extent that Roosevelt had a setback in 1937 it was not due to following stimulative policies but rather abandoning them too soon.

All indications are that Obama has learned that lesson and will not make the horrendous mistakes of Hoover, nor the smaller ones of Roosevelt.

But as for Roosevelt having failed, a look at other statistics shows how far Roosevelt had succeed even before the advent of the War. For example let us look at the figures for six major indices.

Table 1: Statistics
1929, 1931, 1933, 1937, 1938, 1940

Real Gross National Product (GNP)
101.4 84.3 68.3 103.9 96.7 113.0

Consumer Price Index
122.5 108.7 92.4 102.7 99.4 100.2

Index of Industrial Production
109 75 69 112 89 126

Money Supply M2 ($ billions)
46.6 42.7 32.2 45.7 49.3 55.2

Exports ($ billions)
5.24 2.42 1.67 3.35 3.18 4.02

Unemployment (% of civilian work force)
3.1 16.1 25.2 13.8 16.5 13.9


For the Gross National Product we see that it was a whopping 101.4 in ’29. By the time Roosevelt came into office it had dropped to 68.3. Stimulative policies brought this above the ’29 rate, to 103.9 in ’37 but because Roosevelt temporarily deviated from sound Keynesian principles and tried prematurely to balance the budget it dropped to 96.7 in ’38, but upon a reversal of those policies reached a new high before the war of 113, higher then the record high of ’29.

We see a similar pattern for the other indices. Enormous improvement, a slight set back in ‘37, and again significant improvement by 1940. See the Right Wing website, Conservapivia.

Or let us look at still another graph showing unemployment and real GDP. The enormous success of Roosevelt’s policies is apparent, with a slight and temporary setback in 1937.



How anyone can claim failure for the New Deal given these incontrovertible statistics has to be a mystery to all who like to draw their conclusions from facts and not from immutable Ideology. If Roosevelt faltered it was not because he did too much too long, but because he didn’t do enough long enough. But the legacy that Roosevelt left us with, includes among others Federal Deposit Insurance Corporation, Unemployment Insurance and the many other programs, which even the denizens of the Right admit are brakes on the collapse of the economy. They are a testament to the success of the New Deal, no matter how convenient it may be for them to try to trash it.

As for World War II finally getting us back to full prosperity, I am waiting to hear from the opponents of stimulative spending as to how they think the war got the economy rolling. It took vast government spending on useless armaments (in the sense of having long range economic benefits-it goes without saying that they were essential to winning the war) that were destroyed on the battlefield, to sufficiently stimulate the economy into the post war booms.