Big Government Isn't To Blame for Bad Economy??

I read this column this morning, and just can't believe that people really think this way.  Then again, guess I shouldn't be surprised by a professer from UC Berkley.

I've put the original article in italics and my responses in bold.

Here's the original article:  http://www.sfgate.com/columns/reich/


Big government isn't to blame for bad economy



Robert Reich


Sunday, December 19, 2010






The tax deal negotiated between the president and Republicans is the latest version of trickle-down economics. It also confirms the Republican story of what happened to the economy and how to fix it: The bad economy is big government's fault, and the solution is to shrink government.


But the Republicans' story is wrong.


Here's the real story. Trickle-down economics has been a resounding failure. The Reagan and Bush tax cuts on the wealthy didn't help most Americans.

Well....I guess a robust employment figure since the recession of the 80's isn't good enough. Dems were complaining that there weren't enough jobs when unemployment was at 4.5% - and those are mostly the unemployable, those between jobs, and the vountarily unemployed. It also lead to the record surpluses during the Clinton administration. Hmm....Seems like it worked pretty well overall.

For three decades, an increasing share of the benefits of economic growth has gone to the top 1 percent. Thirty years ago, the top 1 percent got 9 percent of total income before taxes. Now they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged, adjusted for inflation.

Soo.....what you are saying is that the middle class incomes kept up with inflation. Year over year, they had the same purchasing power. The real problem is that the middle class was trying to live the life of the upper class, and based it all on debt - myself included. When the housing bubble burst, the adjustable mortgage rates cashed in, and unemployment went up, everyone was left holding the bag. The problem is not income - it's outgo. You could still purchase everything that you needed. Just not what you wanted. I haven't run numbers on this, but my nearest guess is that the increase in the upper income brackets and their paychecks is from unearned income. Stocks, bonds, dividends, other investments. While middle class America was buying a big screen TV on credit, the wealthy were putting this money into stocks. This was also a very robust time in the stock markets. The Dow from January 1981 to January 2008 was up about 1200%, the S&P 500 up about 1000%. So a dollar invested in 1981 would be worth $1200 today. Even factoring in inflation, that's a 490% increase.

As a result, America's vast middle class no longer has the purchasing power to keep the economy going. (The rich spend a much lower portion of their incomes.) The crisis was averted before now only because middle-class families found ways to keep their spending up even though their wages flattened - by women going into paid work, by working longer hours and finally by using their homes as collateral to borrow. But when the housing bubble burst, the game was up.

Precisely. The middle class borrowed their way to prosperity. Thus the banking crisis, thus the credit card defaults, thus the massive amounts of foreclosures. What was considered affordable was based on income with overtime. Overtime dried up, then the job dried up. Bills didn't get paid. Debt is the problem, not the rich.

The solution is to reorganize the economy so the benefits of economic growth are more widely shared.

There are already countries like this, Greece, Ireland, North Korea, it's called socialism and communism.

Exempt the first $20,000 of income from payroll taxes, and apply payroll taxes to incomes greater than $250,000.


Extend the Earned Income Tax Credit - a wage subsidy - all the way up through families earning $50,000.

This is where you are way, way, way wrong and a little research goes a long way.


I just ran a 2009 tax return on a married couple with 3 kids using a standard deduction. Note that the income limit for 3 kids in 2009 tax year was $48,279 MFJ with three kids (45,295 for 2 kids, and 40,463 for 1 - this is going up in TY2010. Their total tax liability was $538 before the child tax credit. They got their tax reduced to $0. Now, they get back all of their withholdings ($1357), the ADDITIONAL child tax credit of $2462, making work pay for $800 and the EITC of $1738.


So this couple is actually getting a REFUND of $6357. This is redistribution of wealth. They are actually getting an 18% bonus on their gross wages courtesy of Uncle Sam. Nothing paid in, but $5K coming back - and withholdings don't count. They are all getting paid back in this example. If we curtail the amount of refundable tax credits, I'd bet we could balance the budget and pay down debt. I'm not advocating that we eliminate these credits in this writing, just that here is part of your problem - not with the wealthy.

Make higher education free to families that can't afford it now.

And who exactly is paying for this? The $6357 refunded in the above example is about a full time semester at a local community college. But I'm pretty certain this will fund big screens and a shopping spree. 

There are also tax credits available (and they are refundable that would add more to this family's tax refund). Along with the numerous grants offered at both the state and federal levels. The colleges also work with students that can't afford it but really want to go. I think they tried this in Britain didn't they? Oh yeah...riots in the streets...

Create an infrastructure bank to repair and rebuild our crumbling roads, bridges, and water and sewer systems.

And where is this money coming from? How about leaving this to the states to take care of - make them balance their budget as well. Take a look at Indiana for a prime example. I don't know how much ARRA money Indiana got - but the highways were already under construction paid for by the states.

Create a new WPA to put the long-term unemployed back to work.

I prefer that anyone that is unemployed for over the state funded 26 weeks is required to perform community service - starting with 4 hours per week and increasing by 1/2 hour per week until they go off of unemployment. I would also like to see this for welfare recipients as well. Even the disabled could perform some sort of community service. This isn't all swinging a broom, raking, or painting. I'm sure the local Boys & Girls Club would love to have someone doing admin work.

Pay for all this by raising marginal income tax on millionaires to 70 percent. This won't hamper economic growth. Under President Dwight Eisenhower, whom no one accused of being a socialist, the highest marginal rate was 91 percent, and the economy flourished.


A millionaire marginal tax of 70 percent also would go a long way toward eliminating the nation's future budget deficit.

And in 1945, there was no exemptions for anyone. Even the lowest wage earners had "skin in the game". We could go back to these policies as well. Also, see the comments on the EITC. Unfortunately, I haven't been able to find the tax tables from 1953, but in looking at the tax charts - from $0 to $2000, you paid 20%. This would be $16,000 today. In the above example from 2009, this would be an equivalent income of $4271. This would put this family in the 26% tax bracket. Rather than 15%.


You also fail to realize that it is much easier to get around the world than it was in the '50's. Thus making it much easier to relocate. I'll predict that if the tax bracket raises to 70%, the only wealthy people around will be those that are making $250K to $3 mill. The rest are leaving town - and the country.

But here's the obstacle. As income and wealth have risen to the top, so has political power. Money is being used to bribe politicians and fill the airwaves with misleading ads that block all of this.

Taliban Dan comes to mind. So does submit to your husbands courtesy of soon to be former Rep. Grayson.

The midterm elections offered dramatic evidence. Shortly after election day, for example, NBC News reported that Crossroads GPS, one of the biggest Republican secret-money organizations, got "a substantial portion" of its loot from a group of extremely wealthy Wall Street hedge fund and private equity managers. Why would they sink so much money into the midterm elections? Because they oppose a proposal by congressional Democrats to treat the earnings of hedge fund and private-equity managers as ordinary income rather than capital gains (subject to only a 15 percent rate), as they're now treated.

And projections right now are that Obama will raise over $1 billion for the 2012 election campaign. The issue here isn't Repub or Dem. The issue is that they all are getting too much money. The politicians we are sending to DC are mostly power hungry and corrupt. Both sides.

In other words, the real problem isn't big government. It's power and privilege at the top.


So another part of the solution must be to limit the impact of big money on politics. This requires, for example, publicly financed campaigns, disclosure of all sources of political spending and resurrection of the fairness doctrine for broadcasters.


It's the same power and privilege that got the Bush tax cuts in the first place and claimed the lion's share of the benefits. It's the same power and privilege that phased out the estate tax.


By agreeing to another round of massive tax cuts for the wealthy and another huge cut in the estate tax, the president and the Democrats are just continuing Republican policy.


Cutting taxes on the rich while freezing discretionary spending (which the president also agreed to do) says, in effect, the underlying problem is big government, and the solution is to shrink government and expect the extra wealth at the top to trickle down to everyone else.


It's another version of the same trickle-down economics America has been force-fed for 30 years, as the rich have become richer and almost nothing has trickled down.


When will we learn?

Actually, I believe the issue is not the power at the top - except in Washington. This is proposing trickle up poverty. The problem is the entitlest state that we currently live in. Everyone wants something for nothing. They want the new sports car in the garage, but will go way into debt in order to get that car.


There are plenty of ways to make a living in this world - it all comes down to desire and not waiting for Big Brother to lay it in your hands. Ultimately, it's the redistribution of wealth through the tax code that is the real culprit here. When half the country has no tax liability and many others are profiting, there is a problem. Simply by eliminating all of the refundable credits would save the country over $6,000 in this one example. They weren't even on the top of the bell curve for EIC. Others get more.


I'm not one to say that these people don't need the help - but an 18% bonus from Uncle Sam sure seems to be a lot. If we reduce the amount of refundable credits - not eliminate - there will be Billions not being paid out in April, increasing the total revenue of the government, balancing the budget.


I won't even get into the flat tax debate here.

Robert Reich, former U.S. secretary of labor, is professor of public policy at the University of California at Berkeley and the author of the new book "Aftershock: The Next Economy and America's Future." He blogs at www.robertreich.org. Send your feedback to us through our online form at SFGate.com/chronicle/submissions/#1.