The Fiscal Cliff and the Coming Swindle
of "Shared Sacrifice"
F. Ivan Goldberg
In recent weeks Washington pols have been running around with their hair on fire over the so-called fiscal cliff. The fiscal cliff is a government edifice erected out of the inability of Congress and the Obama administration to reach an agreement on a set of policies to halt and reverse the large federal deficits and a mounting national debt. The essence of the "cliff" is that, absent an agreement on a package of reforms to stem the hemorrhaging of federal cash by the end of the year, automatic tax increases and spending cuts will go into effect as of the first of January 2013. Specifically, taxes for all Americans will revert to pre-Bush era tax levels, coupled with $600 billion in across the board federal spending cuts.
According to the media, economists
are virtually unanimous in predicting that such an eventuality will hurl the US
economy back into recession, with dire consequences for businesses and
consumers. Oddly enough, since the feared
fiscal cliff began making headlines in mid November, the stock market, as
measured by the Dow Jones Industrial Average, has risen by 6.2%. Apparently investors are not as fearful as
they should be given the narrative being spun by members of the political
directorate. Or is it that they are so
confident that a deal will be struck by year-end that they have already "priced
in" an agreement, an explanation we're hearing from the ubiquitous talking
heads on financial TV? I for one am
always reluctant to ascribe a specific motive to the investor class for every
squiggle in stock prices, but this is neither the time nor place to elaborate
on this reluctance. What I intend to do
here is unearth the story beneath the story, i.e. to raise the question of what
is really going on here.
On the surface the story appears to
be one of a pitched battle between an out-of-touch Republican Party that cares
only for the rich, and a benevolent Democratic Party that is holding fast to a
policy of shared sacrifice for all Americans. The reelection of President Obama is taken as a signal that most
Americans are in favor of shared sacrifice, meaning that everyone, rich or
poor, capitalists and workers, should suffer equally the slings and arrows of
our current outrageous fortunes. The
rallying cry of the Democrats for shared sacrifice appears to many as the
political embodiment of all that is morally fair and socially just. No one to my knowledge has voiced the view
that such shared sacrifice is neither fair nor just. Or, to make the point differently, why, if
there needs to be sacrifice, should it be shared? After all, the bulk of the wealth that has
been created over the past thirty-five years has not been shared, so why should
any necessary disgorging of that wealth be shared?
It is a fact known to every economist
that over this three decade long period worker productivity in the United
States doubled, while real wages, for those lucky enough to be still working,
flat-lined. Where did the market value
of all this increased productivity go? Most
of it we know went to the top one percent, and most of that to the top one
tenth of one percent. To put a social
face on this one tenth of one percent, we are talking about the owners of
capital and the small class of corporate executives who run their businesses.
The historically unprecedented inequality
of income over the past quarter-plus century did not come about as the result
of natural forces: it is the result of
deliberate corporate and governmental policies, from deindustrialization and
the outsourcing of manufacturing to cheap labor zones in what are
euphemistically referred to as "developing countries," coupled with a
restructuring of tax policies skewed to favor the already wealthy. Although the mantra of the Republican Party has
been that we are taxed too much, in point of fact tax revenues as a percentage
of Gross Domestic Product are the lowest in history. In short, the past thirty-five years have
witnessed a massive and orchestrated transfer of wealth from the working class
to the owning class, wealth that for the most part goes untaxed.
One of the reasons for our fiscal hole
has been the narrowing of the tax base that is a consequence of this transfer
of wealth. The diminution of income for
the working class, the driving into poverty of a large segment of what was the
middle class, and tax policies and
loopholes that absolve the wealthy from contributing to the government coffer, are
all factors that have caused the fiscal shortfall that our so-called
representatives are now bemoaning. To be
sure these are not the only factors--two unfunded wars, a massive bank bailout
in 2009, and wasteful, albeit highly profitable, military appropriations must
not be overlooked--but the narrowing of the tax base is key to how we came to
this impasse. And the structural cause
of this narrowing of the tax base has been the gradual but steady
impoverishment of the working class, and the exempting of the owning class from
any just measure of their fiscal responsibilities.
The televised Kabuki dance between
Republicans and Democrats over how to resolve the "crisis" is just that, pure
political theater. Actually it's more in
the way of a magic act. One of the
stock-in-trade tactics of a magician is the sleight of hand: while focusing your attention on his right
hand, the magician's left hand is executing the required deception. So it is here: while our attention is focused on the Right
and the staged intransigence of John Boehner and his cohorts, the Left in the
person of President Obama is about to perform the slickest sleight of hand in
modern US history. Under the banner of
"shared sacrifice," what remains of the welfare state, that apparatus of social
provision set in place under presidents from FDR to LBJ, is about to be thrown
onto the trash heap of history. As a quid pro quo for forcing the Republicans
to cave on raising the marginal tax rates on the wealthiest two percent of
Americans, the Democratic Party will turn a blind eye as Republicans demolish
such programs as Medicare, Social Security, Medicaid, Head Start, Pell Grants,
Aid to Families With Dependent Children, long term unemployment benefits, and a
host of other government-funded social programs, all in the name of shared
sacrifice and fiscal responsibility.
And what does the president's "moral
stand" on raising marginal tax rates on the wealthiest two percent really
amount to? The current top marginal tax
bracket is 35%. The president is asking
that it be raised to Clinton era levels, which was 39.6%. In the end we all know that there will be a
compromise at or around 37%. And even
this may not be permanent: the president
is already hinting that these rates could be rolled back to Bush era levels in
as little as one year. So, after all is
said and done, the wealthiest of the wealthy will, for a time at least, have to
pay an additional two percent on incomes over $250,000 (and even that number is
open to negotiation, and therefore compromise).
For people making (say) a million dollars a year in taxable income,
their extra tax burden will be fifteen hundred dollars. And for hedge fund managers and other drivers
of financial capital who pay taxes at the capital gains rate of 15%, their
comfort zone will not even be tested.
If the notion of shared sacrifice carries
within it the concept of fairness, then shouldn't those who benefited from the
policies that brought us to the need for sacrifice be the ones called on to
make the sacrifice? What might this
mean? It might mean raising tax rates on
the really rich, say those making a million dollars a year or more, to 50% or
60%, until such time that the national debt as a percentage of GDP is back to
pre-Reagan era levels. If you think about
it, this is even more than fair. The
rich get to keep the money they made by shredding the economy; all that is
being asked of them here is that they fork over future gains to repair past
damages--damages from which they, and they alone, benefited.
Of course in the current ideological
climate such a suggestion must appear mad at best, destructively
counterproductive at worst, for it is only common sense (that repository of
collective delusion) that to tax away a portion of the future wealth from the
"job creators" will mean that they will cease to create jobs. The premise behind this argument is that more
money must be placed in the hands of the already wealthy so that they will
invest it and create jobs. But the fact
is that the lack of jobs is not the result of a lack of money. There is today some three trillion dollars of
cash sitting on the balance sheets of US corporations, cash that could be used
to expand their businesses and hire more workers. But it is not being so used. If it were there would be more jobs--and all
that cash would not be held in reserve earning interest of less than one
percent. Add to this the fact that, with
short term interest rates near zero, capital is virtually cost free. And yet that cost-free capital remains
untapped by American business. How many
more trillions must be placed on corporate balance sheets, or on the books of
the Federal Reserve Bank waiting to be lent out, before the captains of
industry see their way clear to tap those reserves, expand their businesses,
and hire more workers? No, it is not for
want of capital that some 20% of the nation's workforce is unemployed,
underemployed, or has just stopped looking for work. The claim that taxing the rich will stifle business
and arrest job creation is the Big Lie running through our economic culture.
Let's return for a moment to the
financial crisis of 2008 and 2009. No
one disputes the fact that an out of control banking system was
responsible. Predatory mortgage lending
to low-income and financially unsophisticated working people, the subsequent
securitization and sale of these mortgages by investment banks, and the
leveraged speculation in these securitized mortgages by hedge funds and banks,
was a perfect setup for inevitable catastrophe. Some of the institutions with leveraged portfolios of mortgage paper had
the foresight to purchase a kind of insurance to hedge the risk of falling
prices through a financial instrument known as a credit default swap. As if to add actual insult to potential
injury the single largest issuer of credit default swaps, the insurance giant
AIG, didn't bother itself to have on hand the cash reserves sufficient to honor
even a fraction of its insurance liabilities.
It was operating under the assumption (or hope, or faith) that home
values in America never go down, at least not all across the country at once,
and not for very long. But that is
exactly what happened.
When by 2007 the predictable defaults on
subprime mortgages drove down home values, destroying the underlying collateral
of these mortgage securities, their market prices went into free fall. And since these securities had been acquired using
insane leverage (in many cases as high as thirty-to-one: meaning that thirty-one million dollars of
mortgage securities could be purchased using only one million dollars of
investment capital and thirty million in borrowed funds), margin calls began
falling like confetti down the canyon of Wall Street, calls the leveraged
speculators could not meet. Nor could
they raise the money to meet these calls by selling their mortgage assets, for
everyone was rushing to sell the same toxic securities at the same time, only
to find that there were no buyers. And
when, as most notably in the case of Goldman Sachs, they turned to AIG to make
good on its insurance of these securities, it turned out that AIG did not have
the cash to honor its obligations. In a
flash the global credit system imploded in a financial big bang. Within days banks were even afraid to make
overnight loans to one another. The
global financial system was in meltdown. Nothing like this had been seen since the debt liquidation crisis of
1929-32.
I bring this up in such detail because as
a result of the financial crisis two things happened that figure in a large way
to our having to face the fiscal cliff: (1)
an economic recession in which millions of Americans lost their jobs, thus
lowering even more the tax base and, in addition, burdening the federal
government with having to pay out large unemployment benefits to those thrown out
of work; and (2) a federal bailout of those financial institutions that found
themselves insolvent from their massive holdings of paper that was now close to
worthless, paper acquired with funds borrowed from other financial
institutions. Untold trillions (by some
estimates up to $20 trillion) in government loans, capital injections and loan
guarantees were funneled from the US treasury to the banks to keep them from
going under. And not just the
banks. AIG too had to be bailed out so
that it could honor its insurance liabilities to the likes of Goldman
Sachs. And not just financial
institutions. The federal government had
to take an ownership stake in Chrysler and General Motors to keep these auto
giants afloat. In short, the current
liabilities of companies affected by a culture of pandemic corporate greed
became the future liabilities of the American people.
Since the Democrats' call for shared
sacrifice is being raised on the flag of fairness, let's try this for
fairness. Let's look at what the
national debt was in early 2007, before the onset of the price decline in
mortgage securities, and what it is now as a result of the mortgage
fiasco. It was around half of what it is
now, about seven trillion dollars. By
any reasonable measure of fairness, when something breaks it is the
responsibility of those who broke it to fix it. By this standard the banks, and the other
implicated financial institutions such as AIG, ought to repair the damage that
their wanton behavior caused to the federal balance sheet. How? Since the American people are the aggrieved
party, they should, through their elected government that claims to represent
their interests, attach the assets of the institutions in question, just as a
defaulted-on creditor is entitled to attach the assets of its dead-beat debtor. Under this arrangement of temporary nationalization
all the profits from these institutions would be returned to the US treasury
until such time as the seven trillion dollars, plus the interest that had to be
paid on that sum, has been collected, after which the assets could be returned
to the original shareholders. Thus in a
single stroke of fairness half our national debt would be paid down, and the bogy
that is the fiscal cliff would fade into memory like a bad dream.
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