Tackling the Public Debt in the US

Nobel Prize-winning economist Joseph Stiglitz writes an article the spells out the obvious facts of economic life that the politicians blunder around unable to see:

Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible.

In the US (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade:

• a massive increase in defense expenditures, fueled by two fruitless wars, but going well beyond that;


• growth in inequality, with the top 1% garnering more than 20% of the country’s income, accompanied by a weakening of the middle class – median US household income has fallen by more than 5% over the past decade, and was in decline even before the recession;


• underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans’ levies; and


• growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization.

As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required. First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest?

Second, military expenditures must be cut – not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist. We’ve continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined.

Following this is the need to eliminate corporate welfare. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks. Corporate welfare accounts for nearly one-half of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world.

There is a lot of sage advice in Stiglitz's article. For that very reason, I'm assured that the politicians will discover it is exceedingly hard to find this article, and if they do have it handed to them, they will discover their eyes have gone bad and they can't make out the details. In short, the politicians are not going to fix America's problems.

Here's one bit that is glaring:

Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)?

Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade.

Yeah, like the politicians are going to fall over each other to raise taxes on the rich. Not in my lifetime. Not after the ultra-rich flexed their muscle this last week and made sure the rest of the country swallows $700 billion in added debt to ensure that the Bush tax cuts will be continued for millionaires and billionaires!

Stiglitz shows he's no dummy. He estimates the likihood that the politicians will pay attention to his Nobel-prize winning economic insights at precisely "nil":

A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands. It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.

There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.

I can't think of a better demonstration of how the US is bound-and-determined to become a banana republic!