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.