The Ecology of Debt

When President Bush says, "Read my lips, no new taxes," what is he asking us to do? It's like saying read my lips square root of four. There are more than one answer or conclusion to the statement. For the square root of four it's plus or minus 2 (+2 or -2). For the taxes it's, no more taxes or lots more debt. So is it just as reasonable to conclude when President Bush says, "Read my lips..." he is really saying no more taxes but much more debt?

We prefer to Borrow

What is so magic or desirable about debt? Why borrow the money when you can raise it with taxes? The United States in comparison with the rest of the developed world is under taxed. Its not that we can't raise the money to run government—we prefer not to do it. We prefer to borrow. From the viewpoint of a middle class tax payer this doesn't make sense.

Voodoo Economics

This is a new way of doing business. It started with Reagan and is now being continued by Bush. David Stockman tried to call attention to the sham in the tax system. He even wrote a book about it. The conventional wisdom was not with him. Wall street and economists preferred to entertain the notion of supply-side economics which held that somehow, by some magic, by not paying our obligations we would suddenly have more money than we knew what to do with. To increase tax revenues, the tax rate was cut 30%. To further stimulate the production of tax revenues, the Federal spending rate was jump started to much higher levels, resulting in the trillion dollar defense build up. The taxes never showed up. They haven't showed up for a decade yet. President Bush says not to worry, read my lips, they're coming.

Social Security trust funds were transferred to the regular budget so that the surplus from those funds instead of being sequestered for the time when the baby boomers would have heavy demands on them are being squandered on the operating expenses of the government—mostly defense spending, since social spending is being cut. When Senator Moynihan of New York proposed to cut the social security payroll tax because it was being misappropriated and the trust to the American people was being violated, the Administration went into overdrive to keep the social security trust funds so they could be used for the regular expenses of the government and so they could mask the magnitude of the real debt. Why is our government so interested in increasing rather than lowering the debt?

Government by Debt

When James Watt was the Secretary of the Interior in the early days of the Reagan-Bush Administration, he addressed a group of National Park Service concessionaires and told them the Reagan Administration was not going to accomplish it's goals through legislation, but through the budget. It seemed an enigma then and it seems an enigma now. Why accomplish goals through debt or more pointedly what goals can be accomplished by running up debt?

We have seen for the last decade that the tax reduction was the rock and the increase in defense spending was the hard place and that the social programs of the United States were between the rock and the hard place. The scandals in HUD indicate the extent to which that Department has been hampered in delivering services to the American people, particularly low income families and children by this laissez faire government policy. The number of homeless in the United States is a national disgrace. We accept it with great aplomb, however, and the census takers will be under the bridges and on the heating grates taking names. I see more beggars on the streets of Washington than I remember as a child in the Great Depression. The holes in the Reagan-Bush safety net are more than large enough to allow persons and families and even communities to fall through. The S&Ls were chartered to encourage savings directed at housing. With deregulation, the S&Ls were hit with speculative fever and outright criminal theft. Far from helping to solve the housing problem the S&Ls have become an additional drain on Federal taxes and I haven't heard of single person going to jail. The Federal government would go all the way to Columbia to find a drug king pin, but won't go around the corner to find a banker stealing money from prospective home buyers?

The Longest Prosperity

President Bush in his campaign said we have the longest running prosperity in the history of the country. Where can this prosperity be found? It certainly is not among the homeless or with the beggars. It is not among the working poor. Can it be with the middle class who had their taxes increased by the Tax Reform Act of 1986? Interest rates and inflation are supposed to be low. But are they really?

Buy Another House

When we bought our first home in the Washington suburbs, in 1968, we put $4000 down on the house. The house had five bedrooms and cost $32,800. The real estate agent said why are you doing that, you can get the house for $2000 down. I said what will I do with the rest of the money? He said, buy another house. I thought he was nuts. We didn't know it but that was prosperity. There has been a four fold increase in inflation since then. That same house now costs $150,000 and it would take at least 10% down with another 7 or 8% in closing costs to buy it. Dividing my present salary by 4 does not take me back to 1968. Some prosperity where real gains barely keep up with inflation. Its not that way all over, however.

Sloshing At The Top

Even with their tax rate lower than the middle class, the upper class is supposed to be paying more income tax in the aggregate than the middle class. If the rate were fair and progressive they would be paying even more. It is some indication that money is sloshing around at the top of the economy. President Bush wants to cut the capital gains tax. He believes it will stimulate growth and increase jobs. He is willing to fight hard in the Congress to get the cut. What evidence do we have that pouring tax money in at the top of the economy will cause capital formation and economic growth? Our evidence is all to the contrary. Rich people speculated on junk bonds because of the chances of large, quick, profits. The demise of Drexal, Burnham, Lambert, the daddy of junk bonds will certainly put a damper on that. Before they filed for bankruptcy under Chapter 11, the officers of Drexal, Uurnham, Lambert, paid themselves huge bonuses—as much as 10 million dollars a piece. So much for honor and integrity among bankers. The people for whom the capital gains tax is the most important are stock speculators. Rather than cut their capital gains tax, they should be taxed as gamblers—losses not to exceed winnings. There might be some merit in providing tax relief for holders of long term investment, particularly if it resulted in increased productivity or increased the number of jobs. Persons getting capital gains out of the sale of their residence are usually long term holders of the property. Do people who have had their nominal income tax rate cut from 70% to 28% need more tax cuts?

We Don't Need New Taxes—We Need the Old Ones

We won World War II with a nominal income tax rate of 90%. We achieved our maximum in prosperity in the 70s with a nominal tax rate of 70%. What is the magic in reducing the taxes further than they are already reduced? If we went by correspondence between prosperity and taxes we would increase taxes to get us out of this rut of debt and market loss.

Profiting From Debt

Who benefits from the debt. I pay about 20% of my income taxes just to pay the interest on the national debt and that's not touching the principal which some day will have to be paid. Printing bonds is no different from printing money. Neither is based upon the productivity of the nation and must be based on the hope of future productivity or the sale of capital assets.

What are the impacts of the high debt? Here are some negative ones.

• It costs 180 billion dollars just to pay the interest on the debt. Not too long ago that was the entire Federal budget. It's 20% of your and my taxes and it comes off the top. It comes before adequate medical care for the elderly or proper health care for pregnant women or schooling for children. Payment of the debt comes before every other thing you may hold dear and of high value because we can't afford to have a bad credit rating. We might have to sober up.

• The savings of the middle class goes first for the government's debt requirements and then for other things like capital formation of industry and business. The government out competes by essentially confiscating savings to satisfy bloated defense budgets, rather than allowing the money to be used to finance new plant and equipment or affordable housing.

• The educational system is in a shambles. The infrastructure of the nation is in a shambles. Health care delivery is in a shambles. Even the military which was supposed to benefit from this profligacy is in a shambles, with procurement scandals, equipment that doesn't work and honored members of the defense establishment admitting they overcharged or didn't deliver the goods or the goods don't work.

• Because the savings of the nation are gobbled up by the voracious appetite of the Federal debt, industry is hampered in its drive for competitiveness. (It's not the only problem of American industry but its a major one. For one thing there's the lack of imagination and the inability to smell the coffee.) Because industry is hampered it is not competitive. Being not competitive means losing out to Japan and Europe — running up a large international debt which is being used to purchase the American capital base which means pretty soon we won't have to worry about capital improvements to industry because it will be somebody else's. We are losing the biotechnological industries in this sport of foot shooting.

• As a nation we are losing our economic hegemony. We have advanced our political hegemony against the evil empire and an assortment of enemies not realizing that the basis of a political hegemony is a strong economy. I am certain the Reagan policies gave Gorbychev the incentive to bring about the changes we see in Eastern Europe. But it was not the threat of our military establishment that nudged him along. In my opinion, it stemmed from Reagan's attempt at Reykjavik to give away our nuclear deterrent and Gorbychev's discovery that Reagan was more interested in eviscerating our own economy than advancing our political hegemony. Taken together, giving away the nuclear deterrent and sacrificing our industrial potential to Japan convinced Gorbychev that the United States posed no threat to the transformation of the Soviet Union. Voila, perestroika is rolling down the track. If my analysis is correct we have to thank God we had Reagan and not Truman as President at this crucial time since Truman would have shown none of the weaknesses necessary to assure Gorbychev he had nothing to fear from the United States.

• Since we are debt poor we cannot afford the better things in life like a good educational system and working infrastructure and social programs that help people. Things like affordable housing. We also cannot afford to help Eastern Europe. If we continue rattling our tin cup in the international money markets we will also lose our influence in determining the uses of international monetary funds. The golden rule as we know it is those who have the gold rule. As a nation we are singing at the bottom of one of the escalators of the Metro reaching our plastic cup to passers by.

• Rich Americans buy about two-thirds of our national debt Japan and others buy the other one-third. So what have we here? The government borrows money instead of collecting taxes. The government borrows that money from the wealthiest Americans—the ones that can afford to invest in nice round numbers of millions of dollars. What we have is a pump called the debt. That pump just like anion pump in a cell is pumping money across a gradient from the middle class to the upper class. How much? Well about 120 billion dollars a year—two-thirds of the interest on the national debt. Why should wealthy Americans invest in risky things like plant and equipment and jobs and stand the chance of getting cleaned out by Japan when they can invest in risk free government bonds? Not only does the government clean out the middle class savings it provides incentives for the wealthy to invest in nonproductive government debt. The economy gets shafted both ways. Money from the middle class that could be invested in America's future is taken along with money the wealthy Americans could productively invest in plant and equipment and jobs and invested in unneeded debt. The debt is a universal palliative. The debt is causing the rich to get richer, more people to be added to the poor and is threatening the existence of the middle class. It is transforming our nation to a third world economy where more and more money and consequently power is being concentrated in the hands of fewer and fewer people.

In the Third World the Rich Don't Pay Taxes

I have always thought the evils of third world economies were caused by the failure of third world countries to tax their wealthy citizens. The same can now be said of the United States. We are excusing our well off citizens from paying taxes and we are accelerating wealth accumulation by pumping it out of the middle class with the debt pump.

The Gas Tax

What's the answer? The short answer is to reinstitute the progressive income tax. That does not seem likely with a read my lips President who prefers debt to taxation. What would have a higher likelihood of adoption is another regressive tax that at one and the same time could solve several important problems. I am speaking of the gasoline tax. For each one cent of Federal gas tax one billion dollars of taxes can be raised. It's a simple formula. The Federal tax on gasoline should be raised a minimum of 50 cents immediately and should ultimately be raised in excess of one dollar. The proceeds of the tax should be dedicated to lowering the principal of the government debt. It should not be spent for one operating program of the United States government. Debt reduction is the key to the salvation of our nation and we should be serious about it.

In addition to reducing the national debt a tax on gasoline would do the following:

• Reduce our dependence on foreign oil which accounts for a large share of our international debt.

• Give incentives for smaller engines. The more the tax, the smaller the engines will get. This will help reduce emissions and help improve the environment.

• Increasing the taxes on gasoline will provide stimulus for domestic production of oil and further reduce our dependence on foreign oil.

• Increasing the tax on gasoline will encourage the search for alternative fuels. The most prominent search should be in the conversion of coal to liquid fuel. The oil companies now own most of the coal so there should be few transitional hardships. We need a carbochemical industry to go with our petrochemical industry. We would be fuel independent well into the 3rd or 4th millennium. How could we lose with a tax that provides so many benefits. After a few years of the high gasoline tax we could get serious about income progressivity.

Another thing we could do to jump start debt reduction is to eliminate wasteful or unnecessary defense spending. For instance:

• Aggressive nuclear weapons such as the Space Defense Initiative (Star Wars) and the stealth bomber.

• Obsolete weapons systems such as the four battle ships in service. They should not be mothballed they should made into museums or scrapped. We could reduce our carrier fleet at least by one half.

By eliminating our debt we will remove a great load from our back. The first great savings would be the interest on the national debt. We would provide incentives for investing in productivity and disincentives for investing in not-productive debt. We could again realize the virtues of being a strong nation, not in weapons but in economics. We could again indulge in our generous impulses and help those less endowed than we. We could then play the role as the most important democracy in the world.

Don't Blame Japan

We should not blame Japan for our troubles. It would have been pretty dumb of Japan not to take advantage of our stupidity and well as our witlessness. Through out history nations have fallen because of the cupidity of their magnates. We are not immune from the fate of other great nations that frittered away their patrimony to satisfy the greed of their influential citizens. There is no excuse for our debt. It was contrived to make us debt poor. If we continue with the sham, we will have only ourselves to blame for a deteriorating standard of living and the status of a second class nation.

Balancing the Budget

We got into this budget deficit dilemma by reducing taxes and increasing spending. We will eliminate the deficit and balance the budget by increasing taxes and reducing spending. Greatness goes with responsibility. Our government owes us responsibility and the unalienable rights not the primrose path. Above all our government owes us honesty. If debt is better than taxes, if being a poor nation is better than being a rich one President Bush should tell us why. In the meantime, good citizenship is the order of the day and good citizens pay their bills and save for a rainy day. Our Federal government could do as much.

...Ted Sudia...
Washington, DC

Smiles

I was sitting in a shoe shine chair. The morning light filtered through the lower leafy branches of the elm tree just inches above my head while the tenor saxophone on the corner played tunes from Showboat. Summertime hovered over the pavement and an occasional person dropped coins into the saxophonist's instrument case.

The shoe shine man was massaging my feet with his shoeshine rag and the dull patina of my shoes was beginning to metamorphose into a shine. People gushed from the Metro stop like water from a fire hydrant. They rose out of the depth like they were being pumped, all sizes and shapes were lifted by the escalator, men and women. They were of an age range because they were all on their way to work. Black, white, asian, hispanic, short, tall, hefty, skinny, well dressed bodies streamed by me. Men in suits, pin stripped and mix and match, women in suits and dresses, skirts and blouses, matching and contrasting jackets and joggin shoes and anklets all maeched past me.

There was not a smiling face in the crowd, well almost none. The faces looked in pain-strained cheeks, narrow staring eyes, furrowed brows, not frowns but not smiles or even incipient smiles. What agony. Yet I knew that they like me were just on their way to work. I couldn't take my eyes off the faces, round and thin, wide, with make up, plain, clean shaven, gaunt visages. These people look like they're on the way to their dentist. They look like they think something terrible is going to happen. They look like they'd seen an auto accident. Not a face in repose and the more I looked, the more I wondered how I looked. Did I have that air of grim determination? 1 smiled but it was not spontaneous. I wasn't smiling at anything, I was just smiling and it seemed wooden, so I rearranged myself on the high chair and looked down to inspect the work on my shoes.

When I looked up the face was visible at the back of the crowd. It radiated. There was no mistake. In that sea of grim, gaunt, harried faces was a smile. With a steady motion the face got nearer. The embodied face finally emerged from the crowd, eyes aglow, with a relaxed infectious smile. In his hand was a bouquet of flowers, carnations I think, my gaze traveling between the face and the flowers. I was smiling this time smiling from within.

Then another and yet one more, at intervals of several minutes. The second carrying a potted plant had a big toothy smile and the third carried a single red rose and wore a smile with little wrinkles that wreathed the eyes, smiling eyes, a beatified face.

The shoeshine man tapped the bottom of my shoes telling me he was finished. I was smiling. He looked up at me and began to smile, asking, "What you smiling at."

"Nothing," I said, as paid him and left, smiling.

...Ted Sudia...

© Copyright 1990
Institute for domestic Tranquility