February 27, 2009

Obama's Tax Plan Would Increase Equality

After the American Century

President Obama has been forced to spend much of his first month in office dealing with Bush's mistakes, particularly economic mistakes. With the submission of a new budget proposal, however, he has begun to present his own vision. He does not want to spend all his time being a fireman putting out Republican fires. Rather, he wants to redesign the economic fabric so that the economy is stronger and more resilient.

In the short term, Obama is spending lavishly to try to escape the mess Bush created. That is the gigantic budget one reads about. But longer term Obama wants to return to the tax system of that most dangerous radical, Dwight D. Eisenhower. During Ike's presidency (1953-1961) taxes on the wealthiest Americans were high, and although adjusted they remained so during the 1960s as well.

During these years the real income of the middle class (in other words their income once adjusting for inflation), rose steadily. After the weak economy of the 1970s, however, Ronald Reagan pushed through dramatic reductions in the tax rate on the wealthy, which began a sizable redistribution of wealth that has lasted for almost thirty years. I lay out the basics of this change in Contemporary American Society (161-166). Just before Reagan lowered taxes on the wealthiest Americans, the top fifth of all US citizens received 43.7% of all income, while the bottom fifth got just 4.3%. In other words, the top fifth made ten times as much as the bottom fifth. By 2005 the poorest fifth had sunk to just 3.4%, while the top fifth received 51.3%. The top fifth made fifteen times as much as the bottom fifth.

What about the middle 60%, the second, third, and fourth fifth? During the same 25 years all of them, the entire middle class, lost out to the wealthiest fifth. In short, between 1980 and 2005, fully 80% of all Americans saw their share in the nation's wealth drop.

With the collapse of the Reagan-Bush economy and its favoritism for the rich, it is time for a new tax code. Something radical. Something that Dwight D. Eisenhower and Harry Truman each supported. That something is familiar to anyone in Scandinavia, and is called progressive taxation. The object of public policy is not to take money from the poor and middle class and give it to the rich, but to give all classes an equal chance to increase their stake in society.

Expect to hear howls of protest from the Republicans and cries of socialism and fears of big government, and the usual rhetoric of the right. For Obama wants to reverse the Reagan revolution. He wants not just to end the Bush tax cuts that threw the budget into deficit years ago, but also to raise taxes on the top fifth of society, in order to pay for the sweeping changes he wants in energy policy, education, and medical care. Over the next decade, Obama wants to get almost $1 trillion in new taxes from the wealthiest Americans. In case you want to know, they are defined as people with incomes of more than $250,000 a year. (More than 1.4oo,000 DK).

Obama is also hoping to save some money through cuts to the Defense Department, partly from winding down the engagement in Iraq and partly through cutting spending on programs that have outlived their usefulness with the end of the Cold War. I wish him luck but am not too optimistic about this phase of his plans. One would have thought that the fall of communism might have reduced defense spending drastically. Back in c. 1990 there was lots of talk of a "peace dividend." There was talk of spending more money on infrastructure, notably decaying bridges and roads. But there was not much of a peace dividend then, and Obama's first defense budget is larger, not smaller, for the two year period of 2009 & 2010, weighing in at a gigantic $1.3 trillion.

Realistically, Obama is more likely to move in the direction of fiscal responsibility via higher taxes on the rich. He will probably be accused of class warfare, but he is trying to end the pillaging of the poor that began under Ronald Reagan. Obama is rejecting "trickle down" economics. He wants the US government to take more responsibility for health and education, and to give Americans back the growth and equality they had in the prosperous 1950s and 1960s. No doubt he will be called a radical and a socialist for trying to do this. Few sensible people ever mistook Dwight D. Eisenhower a socialist.

For a Nobel Prize-winning economist's positive evaluation of the Obama budget, click here.

February 24, 2009

"Rumsfeld Wing" for Baghdad Museum?

Postmodern ruins could symbolize Bush Era

After the American Century

This week the partially looted museum of antiquities "reopened" in Baghdad. Only special guests could see the collections, however. Before the invasion, world archaeologists warned the Pentagon that it needed to be protected. It was not. That looted museum is perhaps a fitting symbol of the Bush years. The former director fled Iraq due to threats to his family, and now teaches on Long Island. The museum itself is not ready to receive tourists, due to security concerns.

One of the many ignoble moments of the Iraq War and its aftermath was Donald Rumsfeld's response to reports that priceless collections had been looted. "Stuff happens" he said. That formulation denies human action and responsibility. But "stuff" does not happen. Rather, generals make mistakes, ignore advice, and are directly responsible for the destruction of cultural heritage. And for as long as people remain interested in the ancient civilizations of the Middle East, Donald Rumsfeld will be remembered as a modern barbarian.

Indeed, they ought to build a special wing in his honor. In the "Rumsfeld 'Stuff' Wing" would be placards next to empty spaces and broken pedestals, each describing missing objects. In the center of the room one could place shattered objects, broken in the thieves' scramble. Such a monument would best be placed underground and lit only by broken skylights. Very deconstructive and postmodern.

To save architectural fees in these difficult times, one might build an identical "W" wing somewhere between 9/11 and Wall Street, and place there valueless commercial paper from failed banks, copies of auditor's reports from Lehman Brothers, and repossessed furniture from executive offices. There should be a place, too, for framed copies of some of the millions of dollars in bonus checks issued to the MBAs who masterminded the mortgage market. Indeed, why not inscribe the names of all who received these infamous checks on walls, in alphabetical order, together with the size of their bonuses, so that every Americans can come and see who they were. It seems only fair, as the American people bailed them out.

Click here for more about the "reopened" museum.

February 09, 2009

Exective Pay and the Angry Public

After the American Century

The average American is furious at Wall Street firms, banks, fat-cat executives, and government bailouts, which do not seem to be helping the ordinary people. But the executives themselves appear only vaguely aware of the unjust disparities between their incomes and those of most people. President Obama has proposed that firms receiving Washington bailouts must limit executive salaries to $500,000.

There is a passage in Tom Wolfe's Bonfire of the Vanities which explains how easily a salary of $1 million a year disappears in New York City. The protagonist of that novel feels he must live in a certain part of Manhattan, send his children to private school, and drive German car, which requires a protected indoor parking space, and so on. The joke is that the monthly $80,000 always disappears before payday, and at the end of the month he feels a little pinched for spending money just like anyone else.

For an up-dated, real life estimation of the costs of being an executive in New York City, an article in the New York Times by Allen Salkin explains how difficult (read impossible) it will be to get along on an annual salary of "only" $500,000 (2.8 million kroner). The assumption is that such executives must have an armed chauffeur, a second summer house that costs $4 million (more than 20 million kroner), and so forth. Reading the piece, one is not entirely certain that the reporter can see the absurdity of these "needs."

But for the record, here are a few comparative facts and figures. Salkin reports that such an executive (defined as male with a non-working spouse) has the following expenses:

Mortgage and monthly fee for a Coop $192,000
Nanny $45,000
Private School $32,000 (per child)
Garage $8400
Driver $75,000-125,00
Personal trainer (3 times a week) $12,000
Formal gowns (for "charity balls"), $35,000

It is perfectly obvious to the 99.9% of the world that does not have an income of $1 million or more a year, that this mortgage is too expensive and that all the other items on the list are unnecessary. Indeed, in New York City even a car is unnecessary, as they have a subway and taxis there the last time I checked.

Now consider the expenditures of the average American family, from the Statistical Abstract of the United States.

Annual income: $48,000 (Black families only $30,800, single mothers, $23,000)
(one tenth the cap Obama has proposed, half what the executive pays for a chauffeur)

House: 6 rooms ( in 2006 before the economy collapsed) $404,000
(one tenth the cost of the executive's summer house)

Automobiles (including monthly payments, insurance, gasoline, etc.) $8,300
(what the executive pays for parking)

Nanny? Are you kidding?
Personal Trainer? The family dog insists on walks
Formal Gowns? Get real.

The average American has every right to be angry, especially when they learn that even as the banks were failing they granted their executives billions in bonuses, paid for by the US taxpayers. But what will be the political consequences of this anger? Will it build up pressure for Obama's programs? Or will it be channeled elsewhere?

February 06, 2009

Republicans Spent Much More on Iraq War Than Obama Wants for Stimulus Package

After the American Century

Those who thought I was too hard on the Republican Party yesterday might want to read Paul Krugman's column today. He also feels that their proposal to substitute tax cuts for spending is a failed Bush policy.

Elsewhere in today's New York Times there is an interesting story about the Japanese economy during the 1990s, when it went into deflation. Then the Japanese government spent a great deal of money on economic stimulus, and there is considerable debate about whether this was successful or not. But one thing is clear. Not all stimulus money is equally effective. Money spent on infrastructure gave the least bang for the yen, while money spent on education was the most beneficial. The test should be whether spending will develop new skills (education), new capacities (spreading broadband more widely), or renew the population (e.g. preventive health care). Such things make the economy more resilient. The least effective way to stimulate the economy is to build more weapons. A row of tanks worth a billion dollars for the most part just sits there, and never creates any new wealth.

However, if you a Republican, then a row of tanks represents a chance to wreck not just one economy, but two, as the economic cost of the Iraq war comes to mind. According to an article in the Washington Post last March, the total cost of that conflict will be more than $1.5 trillion, perhaps even as high as $3 trillion. Thus the Republican Party gladly spent at least twice as much on that war as the Democrats want to use to stimulate the American economy. Is there any logic to Republican thinking? The Republicans have destroyed billions in resources in the deserts of the Middle East, but they will not invest in the future of their own country. They have used billions to defend access to foreign oil, but they will not spend money on green energy which could free the US from dependence on that oil.

A paranoid on the far right might think that subversives (call them economic terrorsits) who hate the United States have infiltrated the Republican Party and twisted its thinking so it will embrace policies that are destructive to the United States. Not being anywhere near that paranoid, I can only conclude that the Republicans are illogical and that they choose badly.

February 05, 2009

The Republican Desire for Disaster

After the American Century

In the last month it has become clear: Republicans want disaster. They want the economy to get so much worse that the public will forget who got them into this economic mess. They are willing to let millions of people lose their jobs and their homes, if only it will take the heat off them and make Obama look like the culprit. How else can one explain the fact that all Republican members of the House of Representatives voted against the stimulus package, even as virtually all economists, regardless of party affiliation, agree that the stimulus package is needed immediately? How else explain that the Senate Republicans seem ready to block the stimulus bill if they can?

The Republican Party may have become irrelevant, and it may be time for Americans to ask themselves if such a party really ought to survive. The death of major political parties is a rare event in US politics, and one has to go back to pre-Civil War times to find an example, when the Whig Party foundered and died rather suddenly, because it could not deal with the sectional crisis. The Republicans emerged as their replacement, and this very year we are celebrating the bicentennial of the birth of the first Republican president, Abraham Lincoln. But as noted earlier in this space, Lincoln would not recognize his party today. He had no Southern support at all, and won what are now called the blue states. Today's Republicans are not the heirs of Lincoln, and conceivably the public will realize this.

The Republicans have moved from irresponsible leadership to irresponsible opposition, and they are quickly losing any meaningful relationship to the emerging majority of the American public. They have lost more than two thirds of the support of Blacks, Hispanics, scientists, and humanists. Even those who used to support them such as doctors and even many stockbrokers are deserting the party. They need to change, or they ought to die, and do so quickly, so another party can take their place. I know, it will probably never happen. Yet at present they are a ball and chain tied to the body politic. They are a useless mass of backward thinkers, with nasty political practices, and they have strong tendencies to xenophobia and red-baiting. Their ranks are rotten with anti-evolutionary and anti-science neanderthals. Indeed, their very persistence as a party may be a kind of proof that human evolution has not taken place. More than half of them actually thought Sarah Palin was qualified. Doubtless, they will long survive because so many of them are so narrow and ill-educated that they cannot change. But can the US remain a world power chained to such a throwback party?

February 04, 2009

Hiding University Reform inside Tax Reform

After the American Century

The traditional tax problem for Danes is how to reduce the world's highest taxes while keeping the welfare state. A Tax Commission has just proposed 35 billion kroner (a bit less than 7 billion dollars) in income tax reductions, to be financed by changes in the tax structure. I want to focus on just one area, reductions in student grants, because this is far more than it appears to be, amounting to a major reversal of government policy on higher education.

The proposal is that student study grants be reduced so that they cover four years. To people outside Denmark, this still sounds wonderful. Not only do no university students pay tuition, but all students qualify for a scholarship worth about 55,000 kroner ($10,500) each year, after taxes. These grants have made it possible for children of working class parents to make their way into the professions. More than just about any other nation, Denmark has made its education system egalitarian. I have had many students who were the first in their families to attend university, and some of them have gone on to quite distinguished careers.

By comparison, in the United States taxes are considerably lower, but parents start saving early to send their children to college. It can easily cost $150,000 (c. 800,000 kroner) to send just one child to university, when tuition, room, board, transport, health insurance, computers, and books are all taken into account. The hardest economic years for American parents are those when children are in college. In contrast, Danish parents may pay huge taxes, but the year a child begins at university creates no hardship, because of the generous "SU," or student grant. In effect, Danish parents have been forced to save for their child's education, and reap the benefits if a child goes to university. But the Tax Commission in effect wants to steal the money middle-aged couples have saved through taxation for the last twenty years. They have paid in with the expectation that their children will receive student aid. But the Tax Commission will divert that money to income tax reductions, and these parents will have to pay a second time if they want their children to get an advanced education.

In theory, it takes a Dane a minimum of five years to complete a BA and MA. In practice, the average student needs six years or more. Reducing the student grant to 4 years means that it will be impossible to get an MA without taking sizable loans, which supposedly will be made available to all who apply, though one wonders if this will really be so. A great many students will likely stop after the BA degree, because they do not want to saddle themselves with large loans.

The Tax Commission surely understands that Denmark will produce fewer MA students as a result. Indeed, I assume that this is their goal, in this way forcing more people to start working full time at a younger age. When the same political coalition was in power during the 1980s and early 1990s it forced changes in Danish education with the professed goal of making the BA a terminal degree for most students. They also cheapened the BA+MA education by cutting it one full year, from six to five. The notion then was that too many people were getting advanced degrees. The then Minister of Education was Bertel Haarder, and people joked that BA stood for Bertel's Academics.

Students see the BA as a second-rate degree and most of them still want to go on for the MA. Yet that earlier reform did save money by reducing the BA+MA combination to five years. This meant that there was a full year less time to really learn a foreign language such as Russian, and it meant that students were less ready to write an MA thesis. For faculty, students losing a year of education meant a reduction of almost 20% in how many people there were to teach. For the gymnasiums, it meant that new teachers were less educated.

The Tax Commission's proposed reduction in student aid extends this earlier downsizing. Once again, the goal is to get more students to stop after their BA, and to reduce the numbers at the graduate level. Once again, the universities will have fewer to teach and suffer cutbacks in staff. The loss of entire departments may follow in some cases.

It is disingenuous to claim that the government's goal is to reform taxes. The amount spent on the extra year of SU is 750 million kroner a year, or a little more than 2% of the proposed savings on personal income taxes. The real goal is to further reduce graduate programs and eliminate some MA programs. One very real result will be a decline in the number of faculty positions, saving half a million kroner or more per eliminated position.

The Tax Commission ignores these larger consequences because they would be unacceptable to many Danes. Indeed, cutting down graduate studies is the exact opposite of the government's own professed desire to invest more in research, raise the education level, and prepare for a future where a highly-educated workforce is the key to success. But this new tax proposal will shrink the pool of highly qualified graduates, eliminate faculty positions, close some MA programs, and undermine the efforts of Danish universities to remain competitive with other nations. It will further demoralize faculties (especially in the humanities) that have been suffering cutbacks for years already. One likely result could be a brain drain, as many of the very best graduates go to work in better financed universities abroad.

As far as education is concerned, this is not a tax reform but a reversal of the government's supposed program.