President Obama has chosen to fight fire with gasoline.
Republicans want America to believe the economy is still lousy because government is too big, and the way to revive the economy is to cut federal spending. Today (Sunday) Republican Speaker John Boehner even refused to rule out a government shut-down if Republicans don't get the spending cuts they want.
Today (Monday) Obama pours gas on the Republican flame by proposing a 2012 federal budget that cuts the federal deficit by $1.1 trillion over 10 years. About $400 billion of this will come from a five-year freeze on non-security discretionary spending -- including all sorts of programs for poor and working-class Americans, such as heating assistance to low-income people and community-service block grants. Most of the rest from additional spending cuts, such as grants to states for water treatment plants and other environmental projects and higher interest charges on federal loans to graduate students.
That means the Great Debate starting this week will be set by Republicans: Does Obama cut enough spending? How much more will he have cut in order to appease Republicans? If they don't get the spending cuts they want, will Tea Party Republicans demand a shut-down?
Framed this way, the debate invites deficit hawks on both sides of the aisle to criticize Democrats and Republicans alike for failing to take on Social Security and Medicare entitlements. Expect Erskine Bowles and Alan Simpson, co-chairs of Obama's deficit commission, to say the President needs to do more. Expect Alice Rivlin and Paul Ryan, respectively former Clinton hawk and current Republican budget hawk, to tout their plan for chopping Medicare.
It's the wrong debate about the wrong thing at the wrong time.
To official Washington it seems like 1995 all over again, when Bill Clinton and Newt Gingrich played a game of chicken over cutting the budget deficit, the hawks warned about the perils of giant deficits, and the 1996 general election loomed over all. Washington politicians and the media know this playbook by heart, so it's natural for them to take on the same roles, make the same arguments, and build up to the same showdown over a government shutdown and a climactic presidential election.
But the 1995 playbook is irrelevant. In 1995 the economy was roaring back to life. The recession of 1991 had been caused (as are most recessions) by the Fed raising interest rates too high to ward off inflation. So reversing course was relatively simple. Alan Greenspan and the Fed cut interest rates.
In 2011 most Americans are still in the throes of the Great Recession, which was caused by the bursting of a giant debt bubble. The Fed can't reverse course by cutting interest rates; rates have been near zero for two years.
Big American companies are sitting on almost $2 trillion of cash because there aren't enough customers to buy additional goods and services. The only people with money are the richest 10 percent whose stock portfolios have been roaring back to life, but their spending isn't enough to spur much additional hiring.
The Republican bromide -- cut federal spending -- is precisely the wrong response to this ongoing crisis, which is more analogous to the Great Depression than to any recent recession. Herbert Hoover responded the same way between 1929 and 1932. Insufficient spending only deepened the Great Depression.
The best way to revive the economy is not to cut the federal deficit right now. It's to put more money into the pockets of average working families. Not until they start spending again big time will companies begin to hire again big time.
Don't cut the government services they rely on -- college loans, home heating oil, community services, and the rest. State and local budget cuts are already causing enough pain.
The most direct way to get more money into their pockets is to expand the Earned Income Tax Credit (a wage subsidy) all the way up through people earning $50,000, and reduce their income taxes to zero. Taxes on incomes between $50,000 and $90,000 should be cut to 10 percent; between $90,000 and $150,000 to 20 percent; between $150,000 and $250,000 to 30 percent.
And exempt the first $20,000 of income from payroll taxes.
Make up the revenues by increasing taxes on incomes between $250,000 to $500,000 to 40 percent; between $500,000 and $5 million, to 50 percent; between $5 million and $15 million, to 60 percent; and anything over $15 million, to 70 percent.
And raise the ceiling on the portion of income subject to payroll taxes to $500,000.
It's called progressive taxation.
The lion's share of America's income and wealth is at the top. Taxing the very rich won't hurt the economy. They spend a much smaller portion of their incomes than everyone else.
Sure -- take some steps to cut federal spending over the longer term. Cut the bloated defense budget. Tame the growth in health care costs by allowing the federal government to use its bargaining clout -- as the nation's biggest purchaser of drugs and hospital services under Medicare and Medicaid and the Veterans Administration -- to get low prices. While we're at it, cut agricultural subsidies.
But don't believe for a moment that federal spending cuts anytime soon will get the economy growing soon. They'll have the opposite effect because they'll reduce total demand.
The progressive tax system I've outlined will get the economy growing again. This, in turn, will bring down the ratio of the debt as a proportion of the total economy -- the only yardstick of fiscal prudence that counts.
But we can't get to this point -- or even to have a debate about it -- if Obama allows Republicans to frame the debate as how much federal spending can be cut and how to shrink the deficit.
The President has to reframe the debate around the necessity of average families having enough to spend to get the economy moving again. He needs to remind America this is not 1995 but 2011 -- and we're still in a jobs crisis brought on by the bursting of a giant debt bubble and the implosion of total demand.
Robert Reich is the author of Aftershock: The Next Economy and America's Future, now in bookstores. This post originally appeared at RobertReich.org.
HuffPost TV: Howard Fineman Discusses Looming Government Shutdown On MSNBC's 'Hardball'
In the third world, this approach is used by generals who declare emergencies and rule under martial law. The US is not quite a third world country yet, and Obama is not a dictator, but the denial of rationality and history and the invocation of absolute, emergency priorities is the same. This is the politics of fear that the Repubs have use for decades. Its goal is to scare Dems and make them agree to accept his preemptive sellouts as necessary, to passively accept the pain of big, unnecessary budget and program cuts, to rely on emotion and ignore reason and economics, and to reelect him because he's less frightening than the Repubs.
Vin Patel
Technologist
http://mindtrades.com
Progressive taxes are fine...but having anyone pay less than 10% is a recipe for disaster.
During that same time we had a Progressive Tax system in place - the American middle class was booming and the rich, although not getting as rich as they are today - still prospered.
The word 'Hypocrite', doesn't really explain the insanity and two-faced side of the Republican policies.
Ford: budget deficit
Carter: budget surplus
Reagan: budget deficit
Bush I: budget deficit
Clinton: budget surplus
Bush II: budget deficit
Notice a pattern?
He has cut deeply into programs that give assistance to the poor. Whose ox is being gored? It will be the least prosperous states with the highest poverty rates. These states have drastically cut their own budgets to the same populations, and yet they have received the greatest amount of Federal largesse. Their politicians sadly are the ones who ironically rail against the Fed as being too big. They make up the major opposition to this President.
in essence they will get what they asked for. Support from more prosperous states via the federal tax code will lessen. Every other method has been tried to wake up the citizens in these states but they refuse to get it. Maybe this will work. Thomas Paine said "Time makes more converts than reason."
After listening some(I couldn't stand anymore than 5 minutes) of Haley Barbour at the Conservative Conference I looked up Mississippi's poverty rate and the amount per capita per dollar sent to Washington they receive back(21+% and $2.02 respectively). Surprise, surprise, they lead the pack of 50 states in both categories. Check out the others on these lists with simple googling. The usual suspects will pop up.
In my opinion President, Obama is crazy like a fox.
You have summed it up exactly as I suspected. I keep thinking that Obama is not a stewpid man. There has to be a reason for these cuts and I had thought perhaps he was just trying to highlight the republicans irrationality over the budget and deficit. But I think you are right. Crazy like a fox.
JFK and Robert Kennedy put their lives on the line for their country, inspired people meaningfully and paid the ultimate price. Unfortunately, half-baked measures of strategy will not depreciate his position but will surely affect the poor and the needy adversely.
This is a time for great courage not great eloquence or gamesmanship. We don't see the former these days.
Where is Elizibeth Warren? Do they have her drugged up in a padded cell somewhere?
Cheers, friend,
FZLO
The US Navy is a "hugh money loser" (sorry if the truth hurts).
Oil subsidies are "hugh money loser"s.
Let's face it: Almost EVERYTHING that the government does, it does at a loss (though many businessmen do get rich in the process), so let's just get rid of it entirely! We can then entrust the region of land formerly know as The United States of America to the enlightened care of Exxon, Bechtel, Enron, and Citigroup. Blackwater, Pinkerton and Wackenhut can provide security (for a 'modest' fee).
Hope this has helped you spot the gaping hole in your perspective.
Our politicians are the thugs doing the Wallstreet Lord's biddings.
http://www.youtube.com/watch?v=ALlzClE67os
"To Give to their criminal friends on Wall Street" - G. Carlin
What the vast majority of economists are saying is now is not the time for the government to not spend, i.e. when you are coming out of a recession. If there was any lesson from what lengthened the Great Depression, it was that when there is no money to spend, the government needs to spend. And, let me add one more thing about corporations and their spending and that is they need demand. All these corporations are going to sit on the cash they have until there is demand. Demand comes from people having money to spend. People having money to spend comes from jobs and their incomes. There has to be government stimulation for infrastructure at this point and there again is spending.
All I am saying is yes, cut, but cut military spending and change the way we handle entitlements. You just can't look at taxes and say "let's tax the poor" and not increase revenues from the rich. (I'm a little guy too by the way).