Brief Comment About Debt and Taxes

This won’t take long.  I do not intend to put up links or post graphs and charts or cite stats (at least, not much).  This is just a short post to make what ought to be an obvious observation but seems to get no traction in the political discourse.

Washington is once more gearing up for a Debt Ceiling Showdown.  According to the president, we’re going to have to borrow some more money before year’s end, which will require raising the limit on what we may borrow—again.  Speaker of the House Boehner has once more drawn a line in the check register and declared “No further!”  What will follow we have seen before.

Yawn.

Just a couple of points:  both sides in this are correct.  The president and his financial advisers are right, we cannot afford to stop spending or the economy will stall out and things will get worse.  This is a true statement.

As far as it goes.

Boehner and the deficit hawks are also right: whether we like it or not, there does come a point at which it is absolutely true to say “We can’t afford it anymore!”  In recent years, that point has been taken as some large percentage of GDP.

The United States is in some ways like a homeowner who has mortgaged close to 100% of the equity in his house and has suddenly been told he has to take a pay cut.  Depending on the good will of friends, neighbors, and lenders, he may well keep his house and at some point start paying down on the debts, but that doesn’t change the fact that he’s gotten himself into a very fragile situation.

Now, the comparison is not precise, but we’re simplifying here.  After all, the homeowner usually doesn’t have a factory in his basement (or a contractor doing the same thing) making things the homeowner can sell—like military hardware and the like—but for our purposes, the similarity will do.

National debate over this issue has been centered on two aspects.  Spending and taxes.

One side says we’re spending too much and need to cut back.  The other says we really need to do something about all those rich people who aren’t paying their fair share of taxes.

Again, both of these points are true—and both are more or less irrelevant.

(Time out for a side comment on this tax thing.  National dialogue is a clumsy beast and the reality of situations often gets buried in the bluster.  Taxes are worse than other subjects, but not by much.  Here is a little fact: when people talk about taxes, no matter which side they’re coming from, they don’t talk about all of them.  On the one hand, the accusation that the wealthy do not pay their fair share is by and large aimed at federal taxes.  And in this the accusation is accurate—no, really, wealthy people and corporations pay very expensive tax lawyers to find loopholes and they do, or they would lose their cushy jobs.  But also, at a certain level, there is no longer such a thing as an American Corporation anymore.  They are multinationals, which means they disperse their holdings across borders, and by shifting things around they avoid taxes.  A lot of taxes, not just American taxes.  But for a lot of people who are well off but not in the 8 and 9 figure club, when they hear that they aren’t paying their “fair share” they quite correctly go ballistic because such accusations almost never take into account state and local taxes, which can in some instances add up to well over 50% of income.  But nationally we’re focused on federal taxes, not ALL taxes. )

(Oh, and the point about corporations being multinationals?  That’s not a tax problem as such.  That’s a problem of jurisdiction.  But never mind that for now.)

I say irrelevant, because, as noted before, to stop spending would be to throw a sequoia in the road to recovery.  Like it or not, federal spending is keeping a lot of business going and a lot of people employed.  When you cut spending, you fire people.  Unless there are private sector jobs that are not tied to government contracts available to rehire them, they turn into the Unemployed (which is becoming like Zombie status these days—once bitten, you’re dead but you still need to eat).  We keep forgetting that roughly half (or more) of government “spending” is payroll and related benefits.

As for taxing the rich, the simple fact is that we could tax them dry and not make up the shortfall.  Focusing on the rich, while in some ways pertinent to our sense of national betrayal and certainly a symptom of the problem, is simply a way of ducking the real problem.

The real problem?

Okay, I said I wasn’t going to cite stats, at least not much, so I beg your pardon for a moment of numbers.  We are also focused like lasers on the Unemployment Rate.

How many of you believe this reflects anything valid?

I said valid, not real.  It certainly does reflect something real, but not what most people seem to think it does, and certainly not what the government pretends it does.

All it reflects is the number of people drawing unemployment compensation as a percentage of the number of people still employed.  It says nothing at all about the people who have exhausted their benefits, fallen off the rolls, and still aren’t employed.

Which number do you think is more relevant?

Here’s where it gets sticky.  If they are no longer drawing public benefits, technically they aren’t a burden, so who cares?  We assume they have found a way to get by.  (Never mind those homeless folks over there.)  Households have increased their residents, adult children have moved back in with parents, parents have moved in with adult children, friends take in friends, etc etc.  So they cost us nothing.  Right?

No, wrong.  They cost us taxes.  If you want to know where the revenue shortfall has come from over the last three decades, it is there, in that growing number of more or less permanently un- and under-employed Americans who lost their jobs, many of them at one time good paying, and have not paid taxes since, because, well, they have no income.

The last time I checked the number was hovering just under sixty million.*

I don’t see anyone talking about that, not directly.  Everyone wants to get the unemployment rate down, as if that means anything to the problem at hand.

Reagan slashed taxes and increased spending.  Except for a brief few years under Clinton, the imbalance created by that has accumulated into the problem we now have.  It’s a thirty-year accrual of debt and hence when I say we can’t tax rich people enough to make up for it, that’s what I mean.

Cutting spending, however, will only increase the unemployment numbers and eventually add to the growing population of permanently unemployed, whose inability to pay normal tax rates has resulted in this current shortfall.  Which shortfall will remain a problem until we can do something about all those unemployed.

Now, the canard that these are lazy people who don’t want to work just won’t wash.  These are people who did work, many of them in well-paying jobs.  Why would they want to lose everything?  It’s absurd.  This is a myth.  To put it bluntly, it’s bullshit.  Have you ever considered how much work it is for someone to take a grocery cart around and fish aluminum out of trash, all day, every day, for pocket money?  But these are the people we don’t see and work we don’t credit.  As the saying goes, a ditch digger works his ass off, burns more calories, goes home worn out, and gets paid a damn sight less than someone pushing paper around a desk for other people.

So why aren’t they working?

Well, that is one of the reasons the rich are getting richer.  It’s systemic.  Jobs have gone overseas, industries have collapsed, communities have been sucked dry to make bottomlines for shareholders without regard to the people doing the actual work.  No one intends anything bad, no one purposefully plans to impoverish their fellows, but this is the way money works in this country, and any attempt to change it is met with ferocious opposition even as we see the inevitable consequences.  It is the worst sort of moral inertia.

But no one in Washington is talking about it that way.  Both sides have valid points—we cannot afford to cut spending and we cannot afford to keep going as we are—and both sides are ignoring the real issue.

You may return now to your regular illusions.

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* Lets do some quick and sloppy arithmetic over this, shall we?  Sixty million people earning on average, say, $30,000 a year.  That’s 1.8 trillion dollars.  Now, at, say, 25% taxes, that’s 162 billion a year, over 3 decades?  That’s 48.6 trillion dollars, which is six times the national debt.  Now, I grant you, these calculations are way too loose, but not so loose as to not be in the ball park and show where the “real problem” is.