by: Ravi Batra, t r u t h o u t | Perspective

Ravi Batra comments that if Democratic President Barack Obama is a “small” socialist, then Reagan was the “Great American Socialist.”

Socialism has been much in the news for some months. Recently, some GOP stalwarts charged President Obama with preaching the heresy. John Boehner, the House minority leader, characterized Obama’s stimulus package as, “one big down payment on a new American socialist experiment.”

“Socialism” is a pejorative term in American politics and needs to be carefully examined. It usually refers to increased government control over the economy, or policies that promote the redistribution of wealth. There is no doubt that President Obama’s economic measures, passed and proposed, will raise tax rates on the richest Americans to pay for increased government funding of health care, green energy and education. So the new president is indeed a redistributionist, but so was Ronald Reagan, except that Obama’s plans will transfer wealth from the rich to the poor, whereas Reagan’s bills transferred wealth from the poor and the middle class to the opulent. In fact, Obama’s measures are puny, whereas Reagan’s were massive. If the Democrat is a “small” socialist, Reagan was the Great American Socialist.

Let’s go back to the early 1980′s. In 1981, Reagan signed a law that sharply reduced the income tax for the wealthiest Americans and corporations. The president asserted his program would create jobs, purge inflation and, get this, trim the budget deficit. However, following the tax cut, the deficit soared from 2.5 percent of GDP to over 6 percent, alarming financial markets, sending interest rates sky high, and culminating in the worst recession since the 1930′s.

Soon the president realized he needed new revenues to trim the deficit, bring down interest rates and improve his chances for reelection. He would not rescind the income tax cut, but other taxes were acceptable. In 1982, taxes were raised on gasoline and cigarettes, but the deficit hardly budged. In 1983, the president signed the biggest tax rise on payrolls, promising to create a surplus in the Social Security system, while knowing all along that the new revenue would be used to finance the deficit.

The retirement system was looted from the first day the Social Security surplus came into being, because the legislation itself gave the president a free hand to spend the surplus in any way he liked. Thus began a massive transfer of wealth from the poor and the middle class, especially the self-employed small businessman, to the wealthy. The self-employment tax jumped as much as 66 percent.

In 1986, Reagan slashed the top tax rate further. His redistributionist obsession led to a perversity in the law. The wealthiest faced a 28 percent tax rate, while those with lower incomes faced a 33 percent rate; in addition, the bottom rate climbed from 11 percent to 15 percent. For the first time in history, the top rate fell and the bottom rate rose simultaneously. Even unemployment compensation was not spared. The jobless had to pay income tax on their benefits. A year later, the man who would not spare unemployment compensation from taxation called for a cut in the capital gains tax. Thus, Reagan was a staunch socialist, totally committed to his cause of wealth redistribution towards the affluent.

How much wealth transfer has occurred through Reagan’s policies? At least $3 trillion.

The Social Security hike generated over $2 trillion in surplus between 1984 and 2007, and if it had been properly invested, say, in AAA corporate bonds it could have earned another trillion by now. At present, the fund is empty, because it has been used up to finance the federal deficits resulting from frequent cuts in income tax rates. If this is not redistribution of wealth from the poor to the rich, what else is?

Thus, Reagan was the first Republican socialist – and a great one, because his wealth transfer occurred on a massive scale. His accomplishment dwarfs even FDR’s, and if today the small businessman suffers a crippling tax burden, he must thank Reagan the redistributionist. However, FDR took pains to help the poor, while Reagan took pains to help the wealthiest like himself.

Reagan’s measures were similar to those that the Republicans adopted during the 1920′s, which were followed by the catastrophic Depression. More recently, such policies were mimicked by President George W. Bush and they are about to plunge the world into a depression as well. Ironically, the Reagan-style socialism or wealth redistribution is about to destroy monopoly capitalism, the very system that he wanted to preserve and enrich.

Wake up America and elect leaders with a heart – not those who would tax your unemployment benefits and cut the capital gains tax.

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Dr. Ravi Batra, a professor of economics at Southern Methodist University, Dallas, is the author of five international best sellers. He was the chairperson of his department from 1977 to 1980. This article is based on Batra’s two books, “The New Golden Age” and “Greenspan’s Fraud.” His web site is Ravibatra.com.

The American people are hurting. As a result of the greed, recklessness and illegal behavior on Wall Street, millions of Americans have lost their jobs, homes, life savings and their ability to get a higher education. Today, some 22 percent of our children live in poverty, and millions more have become dependent on food stamps for their food.

And while the Great Wall Street Recession has devastated the middle class, the truth is that working families have been experiencing a decline for decades. During the Bush years alone, from 2000-2008, median family income dropped by nearly $2,200 and millions lost their health insurance. Today, because of stagnating wages and higher costs for basic necessities, the average two-wage-earner family has less disposable income than a one-wage-earner family did a generation ago. The average American today is underpaid, overworked and stressed out as to what the future will bring for his or her children. For many, the American dream has become a nightmare.

But, not everybody is hurting. While the middle class disappears and poverty increases the wealthiest people in our country are not only doing extremely well, they are using their wealth and political power to protect and expand their very privileged status at the expense of everyone else. This upper-crust of extremely wealthy families are hell-bent on destroying the democratic vision of a strong middle-class which has made the United States the envy of the world. In its place they are determined to create an oligarchy in which a small number of families control the economic and political life of our country.

The 400 richest families in America, who saw their wealth increase by some $400 billion during the Bush years, have now accumulated $1.27 trillion in wealth. Four hundred families! During the last fifteen years, while these enormously rich people became much richer their effective tax rates were slashed almost in half. While the highest-paid 400 Americans had an average income of $345 million in 2007, as a result of Bush tax policy they now pay an effective tax rate of 16.6 percent, the lowest on record.

Last year, the top twenty-five hedge fund managers made a combined $25 billion but because of tax policy their lobbyists helped write, they pay a lower effective tax rate than many teachers, nurses and police officers. As a result of tax havens in the Cayman Islands, Bermuda and elsewhere, the wealthy and large corporations are evading some $100 billion a year in U.S. taxes. Warren Buffett, one of the richest people on earth, has often commented that he pays a lower effective tax rate than his secretary.

But it’s not just wealthy individuals who grotesquely manipulate the system for their benefit. It’s the multinational corporations they own and control. In 2009, Exxon Mobil, the most profitable corporation in history made $19 billion in profits and not only paid no federal income tax—they actually received a $156 million refund from the government. In 2005, one out of every four large corporations in the United States paid no federal income taxes while earning $1.1 trillion in revenue.

But, perhaps the most outrageous tax break given to multi-millionaires and billionaires happened this January when the estate tax, established in 1916, was repealed for one year as a result of President Bush’s 2001 tax legislation. This tax applies only to the wealthiest three-tenths of 1 percent of our population. This is what Teddy Roosevelt, a leading proponent of the estate tax, said in 1910. “The absence of effective state, and, especially, national restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power. The prime need is to change the conditions which enable these men to accumulate power which is not for the general welfare that they should hold or exercise.… Therefore, I believe in a…graduated inheritance tax on big fortunes, properly safeguarded against evasion and increasing rapidly in amount with the size of the estate.” And that’s what we’ve had for the last ninety-five years—until 2010.

Today, not content with huge tax breaks on their income; not content with massive corporate tax loopholes; not content with trade laws enabling them to outsource the jobs of millions of American workers to low-wage countries and not content with tax havens around the world, the ruling elite and their lobbyists are working feverishly to either eliminate the estate tax or substantially lower it. If they are successful at wiping out the estate tax, as they came close to doing in 2006 with every Republican but two voting to do, it would increase the national debt by over $1 trillion during a ten-year period. At a time when we already have a $13 trillion debt, enormous unmet needs and the highest level of wealth inequality in the industrialized world, it is simply obscene to provide more tax breaks to multi-millionaires and billionaires.

That is why I have introduced the Responsible Estate Tax Act (S.3533). This legislation would raise $318 billion over the next decade by establishing a graduated inheritance tax on estates over $3.5 million retroactive to this year. This bill ensures that the wealthiest 0.3 percent of Americans pays their fair share of estate taxes, while making sure that 99.7 percent of Americans never have to pay a dime when they lose a loved one. It also makes certain that the overwhelming majority of family farmers and small businesses never have to pay an estate tax.

This legislation must be passed because, with a $13 trillion national debt and huge unmet needs, we cannot afford more tax breaks for millionaire and billionaire families. But even more importantly, it must be passed because the United States must not become an oligarchy in which a handful of wealthy and powerful families control the destiny of our nation. Too many people, from the inception of this country, have struggled and died to maintain our democratic vision. We owe it to them and to our children to maintain it.

Dr. Ravi Batra: New Thinking on the Economy

Monday 16 March 2009

by: Matt Renner, t r u t h o u t | Interview

Maverick Southern Methodist University economics professor Ravi Batra says the financial crisis is just one symptom of a long-festering economic disease – a disease caused by neglecting basic economic principles over the past 30 years. Comments made by President Obama seem to echo Dr. Batra’s understanding of a domestic economy choked by consumer debt.

“Even as we’re focused on the financial system and the credit markets, we are laying the foundation for what I’m calling a post-bubble economic growth market,” Obama said Friday afternoon, adding “the days when we are going to be able to grow this economy just on an overheated housing market or people spending – maxing out on their credit cards, those days are over.”

Dr. Batra insists that pursuing economic policies that begin to reverse a decline in the real wages of individual consumers is the only way to heal the limping economy. Changes in the “wage-productivity gap” – or the difference between how much consumers earn and the value of goods and services an economy produces – can explain the current situation and can help guide policy-makers out of it.

I spoke with Professor Batra about the current meltdown and how it can be viewed through the lens of the wage-productivity gap.

Matt Renner: What is the wage-productivity gap and how does it affect the health of an economy?

Dr. Ravi Batra: The wage-productivity gap is the gap between the real wage and labor productivity. The real wage is the purchasing power of the average salary. If productivity rises fast and the real wage rises slowly, then a wage-productivity gap develops and grows.

MR: When there is production and wages don’t keep pace, what is the result?

RB: Productivity is the main source of supply, whereas wages are the main source of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction.

Many like [former Federal Reserve Chairman Alan] Greenspan and other economists love the productivity rise, but if it leads to overproduction, that leads to high unemployment such as we are seeing now. Overproduction is a disaster and it leads to depressions.

If businesses don’t sell what they produce, they lose money, and when they lose money, they have to lay off people.

MR: In the United States, how did the recent wage-productivity gap begin to rise?

RB: It started off with [President Ronald] Reagan. The wage-productivity gap started to develop in 1981. Reagan’s economic policies increased productivity while restraining wages. One example is “free trade,” which increased productivity but also reduced the real wage in the United States.

Also, the policy of regressive taxation. Reagan raised every tax that burdens the poor, but sharply reduced the income tax; all this caused a fall in consumer demand. Economic growth fell after Reagan’s policies were introduced. Slow economic growth leads to pressure on wages because low growth means low demand for labor relative to labor’s supply, so wages fall.

The third reason the wage-productivity gap grew as a result of Reagan was the “merger mania.” Big firms were permitted to merge with each other. Each time there was a merger, there were layoffs, which also exerted downward pressure on wages. Mergers also increase productivity, further widening the gap. Reagan’s anti-union policies were also responsible for the falling wages.

MR: If the wage-productivity gap was widening, how did policy-makers prevent the inevitable overproduction and economic contraction?

RB: Each time the wage-productivity gap goes up, the economy will contract because of overproduction. What they did was come up with a scheme to create debt in the economy because, by creating debt, they could raise demand to the level of supply.

Initially they started off with increased government debt. The deficit went up under Reagan, which raised demand to the level of supply. Then Greenspan took over as Federal Reserve chairman and whenever there was the threat of overproduction, like when the stock market crashed in 1987, he brought interest rates down sharply. By bringing interest rates down, he lured people into borrowing. This began to create private debt on a larger scale.

This really postponed the wage-productivity gap problems for the future because under these policies, productivity rose every year, so debt had to increase every year unless wages were to rise. Since productivity rises exponentially, debt had to rise exponentially as well. In such a situation, it is not hard to imagine a day when the credit system would simply explode. That’s what happened starting in 2006 or 2007.

MR: The financial emergency, or the freeze in lending, is being touted as the most pressing aspect of the crisis. Why are banks unable or unwilling to lend?

RB: The biggest problem is that consumer debt is so high and the public has used up all its collateral. The banks don’t feel confident enough to lend to anybody. The banks have lost so much money that they are feeling gun-shy now.

What we are seeing now is called “debt-unraveling” which is the biggest pain in the world. The potential for this scenario is worse than what happened in the Great Depression. During the Great Depression, consumers did not have that much debt.

The situation could be as bad as the Great Depression because, while banks are protected by the government, the 401ks and other investment plans are not protected. People are losing their savings through the fall in stock prices. The end result is the same: their savings are disappearing – the same thing that happened in the Great Depression.

MR: What policies close a wage-production gap?

RB: We should be following policies that close a wage-production gap, but that means you have to go against policies that created it: free trade, regressive taxation, and merger mania. This is not going to be easy and it will require a revolution in thinking.

This will entail breaking up companies, raising taxes on the rich and lowering them for the poor. I’m not sure the country is ready for this yet, but it will be once we fall deeper into the abyss.

MR: What do you think about the current steps the Obama administration is taking to address the economy?

RB: First of all, they are confusing cause with effect. They think the cause is the financial crisis, but actually that is the effect. The cause is the rise in the wage-productivity gap. The gap between supply and natural demand [as opposed to artificial demand created by easy access to debt] is so vast now. That gap cannot be plugged easily, especially if you’re not looking in the right place.

Freeing the credit markets won’t end the recession, because why would a bank lend money when it’s afraid that it won’t come back? When the borrowers are not creditworthy and have no collateral, why would a bank want to lend them money?

The Obama administration should focus on trying to help the economy grow. The stimulus package will help in the sense that it will slow down the bleeding, but it won’t stop it. If all the policies that led to the growing wage-production gap remain in place, the stimulus package will not end the recession. Balancing trade – reducing the trade deficit to zero – would be a huge step in the right direction.

Look at the economic policies of the 1950′s and 1960′s – balanced trade, breaking up monopolies – for example, Exxon-Mobil will have to become Mobil and Exxon; raise taxes on the wealthy and cut them on the poor. Those economic policies will close the wage gap. Those were the decades in which growth was very strong, between four and four and a half percent every year. Since Reagan took over, growth has been three percent or less.

www.truthout.org

From the Thom Hartmann daily blog

Treasury Secretary Timothy Geithner has announced that the Obama administration will let tax cuts for the wealthiest Americans expire on Jan. 1, despite calls from a small group of mostly millionaire conservadem politicians. Mr. Geithner said it’s part of the effort to bring down the mounting deficit, although the White House does plan to extend tax cuts for middle- and lower-income Americans. With the exception of two world wars, for over two hundred years the debt of the United States rarely and only briefly surpassed what would be one trillion dollars in todays dollars. That long American history of fiscal sanity came to a screeching end when Ronald Reagan was elected and dropped the top income tax rate on millionaires and billionaires from 74% down to less than 30%. The result was an explosive tripling of the national debt to nearly three trillion dollars during Reagan’s administration. George HW. Bush, afraid to raise taxes added another trillion or so, (Remember: Clinton left a $237 Billion surplus in 2000),….and George W. Bush – fully embracing Reagan’s voodoo economics- added almost another five trillion to the debt. While letting tax rates rise back to Clinton era levels is a good start that will probably somewhat reduce our annual budget deficit, the real solution is to end the thirty years of voodoo economics insanity by rolling back the Reagan tax cuts.