[Peace-discuss] Some sense on the USG deficit

[C. G. Estabrook]

"The real debates all along should have been—and now ought to be—about who pays 
how much in taxes and who benefits in what ways from government spending. 
Deficits are necessary neither in normal economic times nor when crises hit and 
government stimulus is required. That business and the rich prefer lending to 
finance government deficits over being taxed instead is just their 
understandable self-interest."


Deficits: Real Issue, Phony Debates
What's at stake on either side of the class divide.
by Richard Wolff.
Published on December 1, 2010

Deficits have now risen, yet again, to headline status. Conservatives inside and 
to the right of the Republican Party frame the national debates by attacking 
deficits. They want to reduce them by cutting government spending. Liberals 
respond, as usual, by insisting that overcoming the crisis requires big 
government spending (“stimulus”) and hence big deficits. Most Americans watch 
the politicians' conflicts with mixtures of confusion, disinterest, and disdain. 
Yet deficits pose a real issue for everyone, one that the debates among 
politicians and their economist advisors miss, ignore, or hide.

When the federal government raises less in taxes and other revenues than it 
spends, it must borrow the difference. Such annual borrowing is each year's 
deficit. The U.S. Treasury borrows that money by selling bonds, federal IOUs, to 
the lenders. The accumulation of annual deficits comprises the national debt, 
the total of outstanding U.S. treasury bonds. So the first and simplest 
questions about deficits are (1) why does the federal government choose to 
borrow rather than to raise taxes? and (2) why does it borrow rather than cut 
its expenditures? The twin answers are profoundly political. Elected officials 
are afraid to raise taxes on business and the rich because their profits and 
great personal wealth can then finance the defeat of officials who do that. 
Cutting government spending that benefits business and the rich is avoided for 
the same reason. As the tax burden shifted increasingly onto middle- and 
lower-income people in recent decades, elected officials have faced rising tax 
revolts coupled with demands for more government services and supports.

In the United States—as in most capitalist countries—business and the rich, on 
one side, and the middle-income and the poor on the other, have placed the same 
demands on the government budget. Each side has wanted more government spending 
on what it needs and less taxes on its incomes. Both political parties thus fear 
raising taxes or cutting spending on the masses because that risks electoral 
defeats. This has been a very real, basic, and socially disruptive contradiction 
built into capitalist systems.

These days, business and the rich want both massive government supports to 
overcome the current crisis as well as their usual government benefits. The 
latter include government activities abroad—including wars—that secure export 
markets and access to crucial imports (e.g., the needed quantities and prices of 
business inputs and consumer goods not domestically available). They also demand 
the particular subsidies typically provided to agricultural enterprises, 
transport companies, defense producers, and so on, as well as tax reductions 
offered for various kinds of investments. Businesses press government to 
maintain or expand roads, harbors, airports, schools, mass transportation 
systems, and research institutes crucial for their enterprises' profits. Wealthy 
individuals want government spending on the police and judicial systems that 
protect their wealth.

Business and the rich likewise want the government not to raise their taxes. 
Businesses seek to keep in place their legal opportunities to evade taxes on 
profits (by means of offshore operations, internal transfer invoicing, etc.). 
Business and the rich in the United States want donations to their own 
foundations, to rich universities, art institutions, and their favorite 
charities to remain subsidized by generous federal tax reductions granted for 
such donations. They also currently demand the continuation of Bush-era tax 
exemptions and deductions on taxes on their incomes and on the estates they leave.

Middle-income and poorer Americans demand government spending for their 
unemployment insurance, as well as spending to prevent or soften the blow of 
home foreclosures, to provide low-interest mortgage money for their home 
purchases or refinancing, and to guarantee low-interest educational loans for 
their children. They want public schools well financed to function as means of 
advancement for their children. They support government regulation to guarantee 
safe and honestly labeled consumer goods and services and likewise health and 
safety on their jobs. They demand Social Security retirement benefits and 
Medicare. They share support for Medicaid, food stamps, and welfare, despite 
some demonization of those programs and their recipients. And they oppose both 
more taxes and higher government deductions from their incomes for these programs.

In all capitalist countries, more or less, the contradiction between these 
conflicting financial demands on the government's budget has shaped politics. 
Thus, elected officials have neither raised taxes nor cut spending enough to 
bring them into balance. Instead they have increasingly resorted to 
borrowing—running budget deficits. The officials like deficits because they reap 
immediate political benefits—“satisfying” business, the rich, and all the rest 
by holding down taxes and maintaining spending—while shifting the political 
costs of repaying rising national debt and its rising interest costs onto 
office-holders coming after them (today's equivalent of Louis XV's remark, 
“aprés moi le deluge”).

Government borrowing also benefits businesses and the rich by offering them an 
attractive investment. They lend money to the government that then repays those 
sums with interest. Instead of losing a portion of their wealth by paying taxes, 
those groups keep that portion (in the form of a purchased government bond) and 
earn more with it. Businesses and the rich are usually major lenders to their 
governments; workers rarely are. The same U.S. business leaders who advise 
governments to “live within their means” simultaneously fill their business and 
personal portfolios with government bonds.

Each country's unique history, culture, and politics determine how much its 
government borrows. In the United States, as elsewhere, successive governments 
(usually of both left and right) have borrowed so much that further borrowing is 
becoming increasingly difficult. One obstacle looms, because the more a 
government pays in interest and debt repayment, the less funds it has to 
undertake the spending business and the public demand. Over the last five years, 
annual interest payments on the U.S. national debt have averaged over $400 
billion. Political opposition to continuing those interest payments, and perhaps 
anger directed against lenders, may arise (as has already happened in Europe). 
Since lenders to governments are overwhelmingly businesses, rich individuals, 
and various government entities (foreign and domestic), such opposition may draw 
on deep resentments. Rising national indebtedness therefore builds its own 
opposition. Where and when that happens or even threatens to happen, major 
lenders stop risking further purchases of government bonds. Unable to borrow as 
before, governments return to face the original problem: which social groups are 
going to be taxed more and/or which will suffer government spending cuts.

Greece, Ireland, Hungary, and Spain are among countries whose people have 
already felt the impacts of their combinations of tax increases and spending 
cuts. In those countries, businesses and rich citizens have been able to impose 
their preferred response to the problem of deficits, what politicians call 
“austerity.” When government borrowing must be reduced or stopped, “austerity” 
means sharply cut government spending on public sector jobs and services for the 
mass of people. Across Europe, government after government is being pressed by 
its businesses and its richest citizens to impose austerity on its people. 
However, also across Europe, slowly but steadily—because they are less well 
organized and financed—labor unions, left parties, and left political formations 
are mobilizing against austerity and for alternative plans. These involve 
raising taxes on business and the rich and/or reducing the government spending 
benefiting them.

Because the United States is the world's richest country and can borrow more and 
more easily than other countries, the federal government has not yet reached the 
limits of its borrowing capacity. However, states and municipalities are 
forbidden to borrow for their operating budgets, so they have already imposed 
austerities across the United States (especially visible in the massive spending 
cuts on public services in California and New York). Yet in the United States, 
too, there are the beginnings of signs of an anti-austerity movement. For 
example, in January 2010, Oregon voters ratified their state's decision to 
respond to the economic crisis neither by borrowing nor by cutting state 
expenditures, but rather by raising over $700 million in taxes on businesses and 
on households earning over $250,000 per year.

Consider this example of this kind of alternative to austerity programs: Every 
year, two companies catering to rich investors survey their clients. Capgemini 
and Merrill Lynch Wealth Management's “World Wealth Report for 2010” counts as 
High Net Worth Individuals (HNWIs) everyone with at least $1 million of 
“investible assets” in addition to the values of their primary residence, art 
works, collectibles, etc. HNWIs in the United States numbered 2.9 million in 
2009: well under 1% of the people in the United States. The HNWIs' investible 
assets totaled $12.09 trillion. For 2009, the total U.S. budgetary deficit was 
$1.7 trillion. Had the U.S. government levied an economic emergency tax of 15% 
on only the HNWIs' investible assets, no government borrowing would have been 
necessary in 2009. Obama's stimulus program would have required no deficit, no 
borrowing, and no additional taxes for 99% of U.S. citizens.

The real debates all along should have been—and now ought to be—about who pays 
how much in taxes and who benefits in what ways from government spending. 
Deficits are necessary neither in normal economic times nor when crises hit and 
government stimulus is required. That business and the rich prefer lending to 
finance government deficits over being taxed instead is just their 
understandable self-interest. The rest of us have not only the right to a very 
different preference, but also a clear basis in economic theory and available 
empirical studies not to abandon our preference for theirs. We only have 
deficits because of who pays and who does not pay how much in taxes and who gets 
how much in government spending.

We should be debating the social acceptability of a capitalist class division 
between employers and employees that places dangerously contradictory pressures 
on government budgets. Had we had such debates and a democratic process of 
deciding them in the United States, deficits and their consequences might have 
been avoided. But that never happened. Instead, the mainstream debates about 
deficits have simply assumed their necessity. Those debates then focus narrowly 
on the size of deficits—whether larger versus smaller is better—rather than on 
why they exist and who benefits from them. No wonder those debates have never 
solved the deficit problem; they functioned rather to obscure the underlying 
issue about who pays for and who benefits from government budgets in capitalist 
societies.

http://www.rdwolff.com/content/deficits-real-issue-phony-debates