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Harlan Green

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The Debt Ceiling: A Manufactured Crisis

Posted: 12/06/2012 7:17 pm

The drive by conservatives to cripple government spending, deregulate whole industries, and emphasize military power over social spending has only made us weaker overseas and at home while increasing the concentration of wealth at the top.

The debt ceiling debate is a manufactured crisis, in other words. But it will become a real crisis if Republican House Leader John Boehner succeeds in his threat to hold up a debt ceiling increase next spring unless there are additional spending cuts. That is to say, cutting government spending further will cripple economic growth for years to come.

"When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase," Boehner said Tuesday in a speech at the Peter G. Peterson Foundation's 2012 fiscal summit. "This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance."

The irony is that if Republicans accepted President Obama's $1.6 trillion current offer of spending cuts and tax increases, the ceiling wouldn't even be reached. There is no "structural imbalance" other than that caused by the reduced tax rates which have siphoned off tax revenues designed to cripple government's ability to spend.

Now an economic study by the Congressional Research Service, the research arm of the Library of Congress, has confirmed what historians already know. The push since 1980 to reduce tax rates hasn't spurred higher economic growth, or more jobs, or done anything to improve the well-being of most Americans. In fact, economic growth has been slowing in tandem with falling upper income tax rates since the Eisenhower era.

Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90 percent; today it is 35 percent. Additionally, the top capital gains tax rate was 25 percent in the 1950s and 1960s, 35 percent in the 1970s; today it is 15 percent. The real GDP growth rate averaged 4.2 percent and real per capita GDP increased annually by 2.4 percent in the 1950s. In the 2000s, the average real GDP growth rate was 1.7 percent and real per capita GDP increased annually by less than 1 percent, a much poorer growth than when tax rates were higher..

The report states that this does not conclusively prove that the ensuing concentration of wealth at the top was the cause of slower growth, but other studies do. Professor James Livingston's book, Against Thrift: Why Consumer Culture Is Good for the Economy, the Environment, and Your Soul, details why economic growth over the last century depended on consumer and government spending, not corporate investment.

Livingston says, in fact:

"... corporate profits are...just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the "shadow banking" system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.

And studies are showing that increasing government spending in areas like infrastructure creates a large multiplier effect in creating jobs and more overall demand for goods and services. A recent paper by the Federal Reserve Bank of San Francisco reported that federal highway spending from ARRA, President Obama's $830 Billion American Reinvestment and Recovery Act, raised that state's annual economic output by at least two dollars, "a relatively large multiplier," for each dollar of federal highway grants received by a state.

Federal spending creates more jobs in both the private and public sectors, in other words. And higher tax rates don't inhibit economic growth. So returning to the tax rates of the Clinton era that enabled the longest growth period in history (10 years) and four years of budget surpluses is the structural reform we need, rather than draconian cuts in government spending.

 

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