Revenue & Spending
The State of the Nation's Budget
The state of the nation's budget can be summarized in one word: underutilized. The economy is still clawing its way back from the worst recession since the Great Depression, but Congress voted to drastically scale back federal spending in 2011 instead of investing in initiatives to spur demand. As President Obama prepares to give his annual State of the Union speech later tonight (Jan. 24), we hope he will argue that in the short run, the federal government should do more, rather than less, to create demand in the economy and leave deficit reduction to 2013 and beyond.
While the recent drop in the unemployment rate suggests that the economy is finally beginning to produce jobs again, 13 million Americans remain unemployed, and 5.5 million (or 3.6 percent of the workforce) have been unemployed for six months or more. Another 10.7 million workers have given up looking for work or hold part-time jobs because they cannot find full-time work. This leaves 23.8 million workers – or 15.2 percent of the entire labor force – "underutilized."
While the monthly pace of job creation has increased (with 200,000 jobs added in December 2011), at the present rate, the country won't replace the 8.7 million jobs it lost in 2008 and 2009 until 2024. Getting the economy back onto its feet will require more government action, not austerity budgets. This means making investments, and that will require revenue. We hope the president will use his State of the Union speech to break out of the austerity frame and discuss the variety of options available to the country to raise the revenues needed for the public investments in infrastructure and education that this nation needs if we want to expand opportunity and build a middle class for the future. Here is our wish list for making that happen.
Congress should undo the debt ceiling deal made in August 2011, which is also known as the Budget Control Act (BCA). The BCA requires cutting two trillion dollars in government spending over the next nine years – which includes $100 billion in cuts in the coming year. These cuts represent the largest reduction in federal spending since the end of World War II. Cuts in government spending mean job loss and layoffs of private as well as public sector workers, more people receiving unemployment benefits and food stamps, and fewer people paying taxes.
With such severe cuts on the way, the economy is on track to take a significant hit, just when it's beginning to turn around. Instead of continuing to decrease, the unemployment rate could stay above eight percent for many more years as a result of these cuts.
While stopping the cuts would be a step in the right direction, more needs to be done. A recent analysis by the Congressional Budget Office showed that for every $1 in goods and services purchased by the federal government, the economy expanded by up to 2.5 times more (as the impact of the public spending multiplied). Funds for states and local governments to pay for infrastructure projects, such as roads or school improvements, had the same effect. Similarly, for every $1 paid in food stamps or unemployment benefits, economic activity is boosted up to $2.10, as the money is immediately put back into the economy and circulates. By contrast, when the federal government gives tax cuts or subsidies to upper-income people, they are as likely to save it as spend it, and the multiplier effects are much smaller.
The CBO report suggests that the best way to spur economic growth is to increase government spending, give states more money for infrastructure programs that create jobs, and increase safety net programs such as unemployment insurance and food stamps.
However, with Republicans insisting that all new public investments have to be "offset" with budget cuts, how do we find the large sums needed to really jumpstart the economic engine? A broad-based tax increase in this environment takes money out of the economy with one hand while trying to stimulate with the other, but more targeted tax increases could redistribute currently speculative or idle funds to more productive uses. For instance, a financial transactions tax (essentially a small sales tax on Wall Street trades) could raise over a trillion dollars over ten years; discourage high-volume, speculative trades; and make the tax system fairer while generating a decent-sized pot of funding for public investments.
Similarly, taxing capital gains at the same rate as ordinary income (something we briefly did in the 1980s) would have the effect of increasing revenues, which could be directed toward long-term public enterprises – infrastructure projects, education, green technologies, and so on. And once again, a secondary effect would be to reduce income inequality and increase tax fairness.
[For more on capital gains taxes, see our Watcher article "Taxing Capital Income Increases Revenue, Reduces Inequality"; for more on financial transactions taxes, see our Watcher article "Financial Taxes Can Raise Revenues, May Help Stabilize Markets."]
Any negative effect that tax increases on high-wealth individuals might have should be more than offset by the multiplier effects of public spending.
Of course, we know that redistributive tax increases of this kind would be impossible to implement with the current composition of Congress, but we hope the president has the strength and courage to expand the conversation on public investments, taxes, and tax fairness. In fact, the major critics of such policies will be the opposition party and political pundits. Polls show the American public supports redistributive tax policies.