Friday, July 23, 2010

Income Inequality is the Cancer of the American Economy : WSJ Errs in Trying to Exculpate Bush Tax Cuts as a Major Cause of Federal Deficits

In a recent Wall Street Journal article, Brian Riedl -- a research fellow at the Heritage Foundation -- in an economic analysis titled The Bush Tax Cuts and the Deficit Myth, alleges that not tax cuts but rather: "Runaway government spending, not declining tax revenues, is the reason the U.S. faces dramatic budget shortfalls for years to come."

Is that true?

We checked out the facts at US Government Spending as a Percent of GDP (Gross Domestic Product), which provides the following historical graph, showing that "pre-recession" there was no dramatic change in U.S. government spending as a percentage of GDP, only an increase "post-recession" in order to deal with the financial crisis, a financial crisis caused in part by those Bush tax cuts. Federal spending as a percentage of GDP has on average not markedly increased since WWII, almost hitting 30% in the early 1950's and staying pretty steady at about 35% until the financial crisis. What did increase markedly, however, was the federal deficit, as the direct result of the Bush tax cuts. Taxes were no longer keeping up with the GDP!

Historical US Government Spending as a Percentage of GDP

Riedl fails to display the above data, misleadingly pointing out as the basis for his arguments that US government spending has averaged 20.3% over the last 50 years, an average figure which is as good as irrelevant to understanding the current financial crisis, for which the CAUSES have to sought elsewhere, as anyone can see who views the above graph.

Riedl tries to place the blame for the financial crisis on a "dramatic upward arc of federal spending", an arc which would in fact be of much lesser consequence or of no consequence at all if the federal government had the money to pay their bills, which they do not, in part because Bush tax cuts wiped out federal surpluses and replaced them with a deficit-oriented economy reliant on tax dollars from a tax base of income earners who, as we shall see below, with the exception of the rich, earn -- as their share of the nation's income -- less and less. The government can not pay its bills that way.

During the Bush administration, billions of dollars were "gifted" back to rich taxpayers who then put that same money back into U.S. treasury certificates, with interest ultimately to be paid for by you know who -- the average taxpayers.

The faulty analysis in the Riedl article thus can not be allowed to stand. We suggest Economics 100 at LawPundit for starters and suggest, as economists have alleged, that income inequality is the chief long-term culprit for the current economic malaise.

Riedl devotes not a word to this important topic.

We might, however, in this context agree with Riedl on one point and that is that the Bush Administration is not solely responsible for the impoverishment of America.

Income inequality began in the 1970's with America's shift to a reliance on foreign oil, and substantial income inequality in America really took off during the Reagan presidency, as these figures from a previous LawPundit posting show:

The current financial credit crisis in America can only be properly understood with a good background of knowledge about the wealth figures that Domhoff presents. Many important facts can be viewed at Who Rules America? online at Wealth, Income and Power, illustrative of which is the following graphic of the development of income in the United States between 1982 and 2000:

Distribution of income in the United States, 1982-2000
YearTop 1 percentNext 19 percentBottom 80 percent
From Wolff (2004).

As Frank Levy writes about Distribution of Income in The Concise Encyclopedia of Economics:
"Beginning in 1938, the income share of the top one-tenth of households fell from 43 percent to about 32 percent, where it remained until the deep blue-collar recession of the early 1980s. At that point, inequality began its return to the levels of the 1920s and early 1930s.6"
We do not have newer data than 2007 for the Bush Administration available when the top 1% of U.S. taxpayers earned close to 24% (!) of all income - another big increase (over 2000 levels), as their disproportionate income share continued/continues to rise steadily. As written at the Wikipedia under Income Inequality in the United States:
"A 2006 analysis of IRS income data by economists Emmanuel Saez at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics showed that the share of income held by the top 1% was as large in 2005 as in 1928. The data revealed that reported income increased by 9% in 2005, with the mean for the top 1% increasing by 14% and that for the bottom 90% dropping slightly by 0.6%.[12] Between 1979 and 2005, the mean after-tax income for the top 1% increased by 176%, compared to an increase of 69% for the top quintile overall, 20% for the fourth quintile, 21% for the middle quintile, 17% for the second quintile and 6% for the bottom quintile.[21] For the same time span the aggregate share of after-tax income held by the top percentile increased from 7.5% to 14%.[21] The diminishing political clout of labor unions, resulting from declining union membership rates, and less government redistribution as well as decreased expenditure on social services are commonly cited as the main causes of this trend.[17] Economist Timothy Smeeding summed up the current trend of rising inequality on the pages of the Social Science Quarterly:[22]
Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be... the majority of large gains are indeed at the top of the distribution."
It is no coincidence that income inequality in America in the present period was/is comparable to that in the United States in 1928, just prior to the Great Depression.

The capitalist system which made America the great nation that it is can not function if 80% of the population have no money.

Nor can the country be saved by outsourcing the economy to China or elsewhere, where people work for peanuts under terrible conditions, or by bringing in cheap "slave" labor in the form of illegal immigrants, a phenomenon which many commercial enterprises support, rather than paying proper wages to citizens and/or legal residents or adjusting the tax system so that "income equality" is commensurate with the type of country that Americans allegedly want to have.

When a country such as America has egregious income inequality, as is currently the case, then something has to give, and that something is the economic system. It collapses and adjustments have to be -- and are being NECESSARILY made by the Obama Administration (thus far not enough in our book) -- the misleading analysis at the Heritage Foundation to the contrary.

Anecdotally, Riedl's idea that the main factor in the swing from federal surpluses to federal deficits under Bush was " economic and technical revisions (33%)" can be assigned -- quickly -- to the wastebasket of wishful thinking. Rather, America has to start legislating better income equality -- and this, fairly soon, or the nation will have difficulty surviving in its present form.

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