Our president did what was needed and necessary during his State of the Union address Tuesday evening. Our country needs to spur job creation and our future economy by making investments into education, infrastructure, R&D, alternative energy and other areas.
Current State of Education and Infrastructure
A brief article in Sunday’s paper caught my attention. It was entitled “Job losses blamed on lack of skills” (ref). A survey conducted by Duke University’s Fuqua School of Business showed that ‘many US companies that are moving jobs overseas are doing so because of a lack of skilled workers here, and not because of the savings..”. And recently, international test scores showed that “15 year olds in the U.S. ranked 25th among peers from 34 countries on a math test and scored in the middle in science and reading, while China’s Shanghai topped the charts, raising concerns that the U.S. isn’t prepared to succeed in the global economy” (ref).
It has been reported by the Pew Research Center (ref) that America’s infrastructure is badly in need of repair, infrastructure that is ‘integral to U.S. commerce and American’s well-being’, and the price tag to repair our roads, bridges, sewers, etc is $1.6 trillion. U.S. economic competitors, China and Germany, are pouring resources into developing advanced energy technology (ref). And China’s railway builders are building high speed rail systems not only in China, but in Venezuela and Turkey, and are bidding for contracts to do the same in the US (ref). Times have indeed changed.
Debt and Approach to Debt
Since 1980 America’s national debt climbed from less than $1 trillion to approaching the size of our national economy. There is good debt, and there is bad debt; I understand that well having been CEO of a business. When a business (or country) assumes debt it is with the intent of investing the debt to spur growth, to increase revenue at a rate greater than the cost of debt – essentially making money off of other people’s money. That is good debt. However, if debt is incurred that does not contribute to growth, that is bad debt. And looking at where we are with education, infrastructure, implementation of new technology, and our debt, it is quite apparent that we have incurred a substantial amount of bad debt over much of the past 30 years.
There is much talk amongst the newly elected Tea Party politicians that the cure for our deficits is to cut spending, and by a whopping $2.5 trillion over the next 10 years (ref). This approach is focusing only one side of our deficits, and that is expense. And that figure is not being discussed in terms of specifics to increase efficiencies or cut waste, it is simply a number that has not been defined; it is unclear what we will be cutting and what its effects will be in the long run on our employment, our economy, and the well-being of our citizenry. Additionally, this approach ignores a fact of growth; as a corporation, or our economy, grows it takes more support, not less – and increasing revenues provides the means to do so. So without the cuts defined, this approach is simply bad business. What is missing in the current dialog is the other very important side of deficit reduction which is increasing revenue by making smart investments to grow our economy and increase our revenue streams over time – and that is what is key to our future success and competitiveness.
What is also missing is a discussion of the underlying causes of our current deficits; the shortfall in revenue from unfunded tax cut policy (the single largest component of the then record deficits during the Bush years), the shortfall in revenue from higher unemployment from this recent severe economic downturn, and increased spending that prevented the economy from falling into another Depression. Despite claims by the likes of Senator Sessions (R-AL) that ‘every bit of our debt fundamentally is overspending in the discretionary accounts’ (ref), examination of CBO data by the Center on Budget and Policy Priorities showed that tax cuts through 2001-2005 (48% of deficit) were over three times the cost of all domestic programs, entitlement and discretionary, increases (15% of deficit) (ref). The deficits from the Bush years just plain were not due to run-away discretionary spending; in large part it was the shortfall in revenue from the tax cuts in addition to increased defense spending (did not include the cost of the wars).
Historically we have had higher debt than we have now; it occurred following the end of WWII when our gross debt was 123% of our economy. We solved that problem and it is important to understand how we did it.
Below are two graphs that I have published before regarding the impact of tax policy on our debt. The first displays our national debt over time in terms of inflation adjusted dollars; the second displays our national debt as a fraction of our economy. But these graphs also tell another story.
With the exception of three years of surpluses under Truman, our post WWII debt remained flat between 1950 – 1980 in terms of inflation-adjusted dollars. Yet during that same time period, our debt became a much smaller fraction of economy. (The sharp increase in debt noted in both graphs at 1980 is the start of modern day supply-side tax cut policy). In essence, we didn’t lower the level of debt in the 35 years following WWII in terms of inflation-adjusted dollars; what we did was to reduce the size of the debt by growing our economy and increasing revenue flows. And we invested heavily to do that, building our interstate highway system under Eisenhower (great boon to commerce, tourism, etc), investing in science and math education in response to the progress of the Soviet space initiative (providing for a better educated workforce), developing new technology from our Apollo program (ref) that spurred advances in computer technology, consumer/home/recreation, health and medicine, public safety, etc. Our infrastructure and technology advances made us the economic envy of the world, and these advances created jobs. And despite our national debt, we were able to do these things because we made the decision to invest in these areas; and the wealthiest of Americans participated with higher tax rates on upper level income (90% during Eisenhower, and 70% under Kennedy onward until Reagan where it dropped to 28% in 1986 ref).
Failure of Supply-Side Tax Cut Policy to Spur Economic Growth
There is much information that the money we borrowed to support tax cuts (largely favoring the wealthiest in America) did not spur economic growth. The policy failed to show any advantage over progressive tax policy regarding growth in US capital investment, GDP growth (the key measure of our economy), jobs growth (total non-farm payrolls), and job recovery following recession. Additionally, during any four year period where this policy has been in effect, regardless of which party controlled Congress, our gross national debt increased when expressed as a fraction of our economy (and that is unsustainable); our debt decreased as a fraction of our economy during the three four-year periods where progressive tax rate policy was in place since the mid-1970’s. And in a global economy, one can not dictate to either the wealthy or corporations where they will deploy the tax cut benefits – those benefits can, and have, been invested into foreign markets rather than ours (I do find that be quite offensive, especially as the debt is being passed to future generations). To avoid redundancy, I have recently published several referenced articles that address these various points (ref) (ref) (ref) (ref).
An Unfair Tax Policy for Middle America
I have had the experience in my life of having lived at income levels that define poverty, the middle class, and the wealthy. About 24% of this nations income is held by 1% of America. It is unfair that in the heart of middle American income there is a 10% increase in federal income tax (and more hikes above that level) when there is only a 2% rate hike for the jump into the upper 1% of income earners – and the tax rate remains flat after that regardless of the amount of income earned (ref). In short, the tax cut benefit to middle America is more than offset by the tax rate hikes they pay. It is unfair to middle America that if the tax cuts are made permanent that filers with income above $1 million would experience a 5.7% increase in after tax income and filers below $50,000 would see just a 2.2 percent average increase in their after tax income (ref). It is unfair to middle America that by 2010 52% of the Bush tax benefit was projected to have gone to the top 1% of income earners in this country (ref). And even Warren Buffet takes exception that he paid a lower overall tax rate on $46 million in income than did his secretary who made $60,000 (ref).
Balanced Approach and Obligation of the Wealthy
What is needed is a balanced approach to solving the debt issue. An approach that addresses spending cuts specifically in terms of reducing waste and increasing efficiency in government rather than just some target that has been thrown out. An approach that includes increased investment in education, infrastructure, research/technology development that will stimulate jobs, increase tax receipts to lower our deficits, provide the foundation for our future economy, protect our entitlement programs, and allow us to remain as a pacesetter in the global economy. And an approach to taxation where the wealthiest step up to the plate and contribute to the building of this nation; because we can not do this without their contribution. For those of us who have achieved this level of success, we did so because of the system we have, and there should be a sense of obligation to keep our country well. And as we have learned, in a global economy, tax cuts at high income levels are not going to spur US capital investment and our economy. And there is public support for this as 61% of America favors raising taxes on the wealthy (ref), only a third of this country feels that the tax cuts to the wealthiest of Americans be extended (ref), as well as support from some of the wealthy such as Warren Buffett (mentioned above).
So, Mr. President, go for it. No better time than the present to build our country – we can’t afford not to.