by Bill Clinton
There are many other variations on these proposals ripe for debate, but the arithmetic is inescapable: we can’t get the debt and interest payments on it down to a manageable level, much less balance the budget, without more revenues. The trick is to do it in a way that is fair, without rates that are high enough to encourage the flight of taxable income to other countries.
The most comprehensive alternative to the budgets passed by the House Republicans and recommended by the Simpson-Bowles Commission is the budget plan of the Congressional Progressive Caucus. It proposes to balance the budget in just ten years with an array of tax increases on upper-income Americans, especially those with incomes over $1 million a year; on estates, with steeper increases on those worth more than $50 million; on capital gains (taxing them at ordinary income rates); on corporate income; and on complex financial transactions. It would also cap standard deductions at the 28 percent rate for those in higher brackets, eliminate tax preferences for oil, gas, and coal companies, and index the alternative minimum tax to inflation. Their changes are projected to raise about $4 trillion over a decade.
On Social Security, their proposal would raise the maximum taxable limit to 90 percent of employee earnings now, not in 2020 as in the Simpson-Bowles plan, and eliminate the cap altogether for employers. On Medicare and other health programs, it keeps the president’s budget savings, adds a public option to the health-reform plan to hold down overall costs, and calls for more negotiated price discounts on government health programs’ high-volume drug purchases from pharmaceutical companies. Beyond health care, all the spending reductions are in the military budget, $1.8 trillion over ten years.
The third part of the progressives’ plan calls for investing more money in programs designed to create jobs and raise incomes: almost $1.5 trillion in an infrastructure bank to finance both traditional projects and new ones like faster broadband connections, a modern electric grid, and building retrofits; more funds for environmental conservation and community economic development; higher investments in education, job training, and special help for veterans and the long-term unemployed; and more spending for housing, rental, and child-care programs for lower-income Americans.
The bottom line on the progressives’ budget plan is that it produces a balanced budget in ten years with deficit reduction of $5.6 trillion, comprising revenue increases of $3.9 trillion, net spending cuts of $869 billion, and interest savings of $856 billion. There are lots of obvious objections to it from those with different perspectives. Seventy percent of the gap is closed with taxes, only 30 percent with spending restraint. It would enact the highest taxes in fifty years on very wealthy Americans. Its corporate tax proposals are so at variance with even our high-tax competitors that multinationals may be tempted to relocate to other countries. Depending on the tax rates and how they’re structured, the financial-transactions tax could either bring in a lot of money or lead to many high-dollar transactions now done in the United States being moved overseas, with a net loss in revenue from the taxable incomes on the people who do the transactions. And the progressives’ plan doesn’t deal with the demographic challenges to Social Security and the health-inflation challenges of Medicare, Medicaid, and other government-funded health programs.
Of course, in this Congress, progressives don’t have the votes to pass their plan. But the plan does two things far better than the antigovernment budget passed by the House: it takes care of older Americans and others who need help; and much more than the House plan, or the Simpson-Bowles plan, it invests a lot of our tax money to get America back in the future business. That makes its specifics worth studying for possible changes and inclusion in a plan with more balance between spending restraint and new taxes.
To sum up, we have a debt problem that will get worse if we do nothing. Increasingly, the debt is being financed by other nations buying our bonds. Most of the responsibility for the debt that has already piled up lies with the antigovernment leaders who supported both big tax cuts and spending increases and, in the last decade, provided lax oversight of financial institutions that were too highly leveraged. Most of the increased spending and tax cuts under President Obama were designed to help America weather the crash. Because they are time limited, they won’t contribute much to the long-term problem. The health-care bill will cost more in tax money, but overall health-care spending will be lower than it would have been without it. And the government’s costs will be less than projected if health-care cost inflation can be reduced, a step that also will keep health costs lower for everyone.
In contrast to the main debt drivers in the past thirty years, tax cuts and national security spending, most of the increase in debt over the next thirty years will come from much more spending on programs progressives support as forthrightly as the antigovernment forces back tax cuts for higher-income Americans: Social Security, Medicare, Medicaid, and other health programs. That means that if Democrats want to both preserve the programs and restore economic growth, they have to develop a plan to reduce their projected costs and to increase investments and tax incentives in areas vital to a quicker economic recovery and to our long-term prosperity. The arithmetic trumps ideology.
We have three choices on the debt. We can live with it, with higher interest rates, slower growth, lower incomes, less economic independence, and the loss of our global leadership. Or we can do what the antigovernment forces want, attacking the problem with spending cuts only, drastically reducing the federal government’s role in providing for future growth through education, research and development, modern infrastructure, and economic development; for a better quality of life in clean air and safe air travel, health-care and income security for the elderly; and for America’s continued world leadership. If we do that, we’ll lower our future economic growth, increase poverty and our already high level of income inequality, reduce our quality of life, and force other countries into alliances with nations that may not share our values and interests. Or we can act to strengthen both the economy and the government’s role in creating a better future by cutting spending and raising revenue in a fair, effective way. That’s what the president and most Democrats want to do. That is the course I favor. According to most polls, a big majority of Americans favor it too.
If you’re an antitax absolutist like Grover Norquist, who works hard to get every candidate for Congress and the presidency to sign a pledge never to raise taxes, this kind of approach, indeed the idea of any more taxes, is heresy. There’s only one way taxes can go—down. That means we can’t cut oil-company tax breaks to finance energy independence with homegrown resources and new technologies. It means Congress can never decide that it’s not right for a successful hedge fund manager’s ordinary income to be taxed at the 15 percent capital gains rate, a lower rate than the fund’s secretaries and other nonprofessional staff pay.13 This makes sense if you think all government activity is harmful and the United States would do better with a philosophy grounded in “you’re on your own” rather than “we’re all in this together.”
Before we get to the most urgent topic—how the United States can get out of the current crisis, create more jobs quickly, and lay the foundation for long-term prosperity—let’s look at where we are today compared with our recent past and compared with our wealthy competitors. After all, we’ve been going down the antigovernment road for thirty-one years now, except for my two terms and President Obama’s first two years. Let’s see what the evidence shows us about how that “on your own” strategy is working for us and look at how other nations with very different policies are doing.
* * *
1 These percentages refer to the percentage of our debt held by the public and foreign governments, not the Federal Reserve’s holdings and the Treasury bonds held by the Social Security and other trust funds.
2 My first full budget was for fiscal year 1994, the last for fiscal year 2001, which began in October 2000 and ran through the first eight months of President Bush’s first year. His tax cuts re
duced the 2001 surplus but didn’t eliminate it until 2002.
3 See TRICARE: Summary of Beneficiary Costs, http://www.tricare.mil/tricaresmart/product.aspx?id=442.
4 For a fuller discussion of Orlando and other areas still generating growth, more good jobs, and new businesses, and the role good government policy plays in fostering and supporting such growth “clusters,” you should read William J. Holstein’s excellent book, The Next American Economy (New York: Walker, 2011).
5 Glenn Kessler, “Social Security and Its Role in the Nation’s Debt,” Washington Post online, July 12, 2011, http://www.washingtonpost.com/blogs/fact-checker/post/social-security-and-its-role-in-the-nations-debt/2011/07/11/gIQAp1Wl9H_blog.html.
6 Peter Orszag and Peter Diamond, “A Summary of Saving Social Security: A Balanced Approach,” May 2004, http://dspace.mit.edu/handle/1721.1/64164; Peter Orszag, “Saving Social Security,” New York Times, November 3, 2010, http://opinionator.blogs.nytimes.com/2010/11/03/saving-social-security/; Robert C. Pozen, “Why My Plan to Fix Social Security Will Work,” USA Today, June 12, 2005, http://www.usatoday.com/news/opinion/editorials/2005–06–12-pozen-edit_x.htm; http://bobpozen.com/.
7 The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform (Washington, D.C.: White House, 2010), fig. 17, p. 65.
8 The same thing happened again in 2010, when another five million Americans lost their coverage at work. This time insurance companies said they had to raise rates to establish a reserve to cover the uncertain costs of complying with the health-care reform law. The policyholders should get some of that money back as insurers comply with the requirement to put 85 percent of premiums into health care, a fact that undermines the case for the big increase in the first place.
9 Mark Schoofs and Maurice Tamman, “In Medicare’s Data Trove, Clues to Curing Cost Crisis,” Wall Street Journal, October 25, 2010.
10 Paul Krugman, “Medicare Saves Money,” New York Times, June 12, 2011.
11 An examination of our health system’s costs compared with other countries’ was done by McKinsey & Company. You can get it at http://www.mckinsey.com/mgi/rp/healthcare/accounting_cost_healthcare.asp.
12 See http://www.americanprogress.org/issues/2011/05/tax_man.html.
13 A lot of the manager’s income is now taxed at the 15 percent capital gains rate, though the income comes not from risking the manager’s own money on investments, but is a fixed percentage of profits earned on capital the manager’s investors risked.
CHAPTER 5
How Are We Doing Compared
with Our Own Past and with
Today’s Competition?
THE MOST SUCCESSFUL NATIONS IN THE twenty-first century have both a strong economy and a strong, effective government. To make this case, which is one of the main points of this little book, I’ll have to persuade you to look at how the United States is doing compared with our own history and expectations and at how we’re doing compared with other countries that are our competitors for the future, both those that are already wealthy and those that are rapidly rising. Believe it or not, you’ll see that quite a few are outperforming us in terms of education, technology, modern infrastructure, research and development, and high-end manufacturing. Many have lower unemployment rates, faster job growth, less income inequality, and lower poverty rates. Some even do a better job of giving their poor people a chance to work their way up the economic ladder into the middle class, the journey we know as the American Dream.
For example, Singapore, an island nation of just five million people, with a high per capita income and a relatively low tax burden, is making a $3 billion investment of government funds, much more than we are, to become the world’s leading biotechnology center. Biotech is expected to produce new products that will create millions of jobs in the next decade. In the past decade, Germany, where the sun shines on average as much as it does in London, soared past the United States to become the world’s leading nation in the production and use of photovoltaic cells.1 How? With government subsidies and targets. A study by Deutsche Bank found that even allowing for the costs of the economic subsidy, the Germans had a net gain of 300,000 new jobs. Based on our much larger population, if we had adopted Germany’s policy, we would have produced more than one million jobs. If you take into account our greater capacity to generate solar power, we could have created twice that many.
Let’s begin with a look inward, comparing where we are now with our performance in the last half of the twentieth century. After World War II until 1980, the bottom 90 percent of Americans consistently earned about 65 percent of the national income, and the top 10 percent earned about 35 percent, of which 10 percent went to the top 1 percent. That was enough income inequality to reward good ideas, successful entrepreneurs, and the best CEOs and enough equality to build the world’s largest middle class and give hardworking poor people a chance to work their way into it. From 1981 to 2010, these numbers changed a lot, as the bottom 90 percent’s income share fell from 65 to 52 percent, and the top 10 percent’s rose from 35 to 48 percent, with almost all those gains going to the top 1 percent, whose income share increased from 10 percent to more than 21 percent. For the first seven years of the last decade, as median income decreased, the top 1 percent claimed around 60 percent of the gains. How did that happen?
Things began to change in the 1970s, as the United States faced more foreign competition from lower-wage nations in basic manufacturing, from Japan in consumer electronics and automobiles and from Germany in sophisticated machinery. The oil embargo led to a surge in the price of oil and other petroleum-based products, increased inflation, and further weakened jobs and depressed salary increases in the manufacturing sector, as did the decline in union membership among private-sector workers. Slow growth with high inflation, called stagflation, along with the Iran hostage crisis, helped Ronald Reagan defeat President Carter and ushered in chapter one of the antigovernment era.
In the early 1980s, the inflation threat ebbed, thanks to the stern policies of the Federal Reserve chairman, Paul Volcker; increased productivity resulting in part from the deregulation initiatives of Presidents Carter and Reagan; and the large infusion of low-cost consumer goods from overseas. By 1983, with the majority of President Reagan’s tax cuts in place and a big buildup in defense spending under way, we were into permanent deficit spending, an ongoing stimulus that was reinforced by the growing reliance of consumers on credit purchases. Meanwhile, manufacturing, facing stiff competition, grew more productive, meaning fewer workers were required to produce the same output, and the United States didn’t generate new manufacturing jobs by increasing exports of new high-end products. So more of our new jobs were coming in the service sector, where wages and benefits in general are lower than in manufacturing.
In the 1980s, Wall Street and many large corporations embraced what was then a new idea—that publicly traded companies’ first and overwhelming obligation is to their shareholders. Until that time, most people thought a corporation, which receives limited liability and other privileges under the law, owed an obligation to all its stakeholders, including shareholders, employees, customers, and the communities of which they are a part. This “shareholders first” philosophy created an ironic situation: A corporation was now supposed to be run primarily for the benefit of the shareholders, who have the biggest interest in its short-term profits but the smallest stake in its long-term success.
This approach has continued unchecked, amplified by the dramatic rise in executive compensation based more on short-term stock appreciation than long-term viability and by an even more explosive increase in funds dedicated to complex financial transactions. These deals generate huge incomes for those who put them together and for CEOs whose companies get a bump in stock prices, but they rarely create jobs for or raise the incomes of ordinary Americans.
Over the last thirty years, this “financialization” of the Americ
an economy, combined with the antigovernment tax cuts, weaker oversight of everything from banks to polluters, and, in the last decade, lax enforcement of our trade agreements, has created a “you’re on your own” economic and social policy that is the bedrock of antigovernment governance.2
This approach has continued to increase the percentage of GDP claimed by the financial sector and to concentrate income gains among already wealthy Americans. It has helped a considerable number of people become millionaires and billionaires, but it has led to stagnant wages for almost everyone else. When the market is rising, it does provide substantial returns to many other Americans through their own investments and those made by retirement, mutual, and other funds, but it’s been lousy for job growth.
Look at the following charts, showing the numbers of jobs created and the growth in national income since 1953. The 1960s performance was the best, followed by my two terms. President Reagan had the third-highest number of jobs, as he began America’s big experiment with trickle-down economics and permanent deficits, but the steam ran out under President George H. W. Bush for all but upper-income Americans, as the big deficits led to higher interest rates and slower growth. All along, middle-class incomes were barely rising, and only 70,000 people moved from poverty to the middle class from 1981 to 1993, compared with 7.7 million in the following eight years.
Meanwhile, incomes on Wall Street and in executive suites of large corporations began their three-decade explosion. For example, in the 1960s, when our economy enjoyed its most rapid rate of growth since World War II, CEO pay in large corporations averaged 25 times that of the average worker. In the last decade, after executive compensation at our largest companies had quadrupled since 1970, the ratio rose to more than 400 times average worker pay before the financial crisis, when it fell back to 300 to 1 because so much executive compensation is tied to stock prices. It’s already rebounded to almost 350 to 1, even though unemployment remains high and most Americans’ incomes are stagnant or declining.
