by Tom Pelham
I fear our Washington leaders delude themselves that “Too Big to Fail” applies to them as well as big banks. While the nation’s bond rating deteriorates and our federal debt to Gross Domestic Product (GDP) ratio rises, Washington blusters on. Our debt to GDP, now near 100%, leans more toward Italy (118.4%) than Canada (82%), Britain (76.7%), and Germany (75.3%) or our emerging economic competitors like Brazil (66.8%), China (19.1%), and Russia (11.1%).
Yet, most Americans understand that decisive action is far overdue. The solutions for both our federal deficit and unemployment problems are not separate, but one and the same. The key to creating jobs in America is to unleash and put to work the more than $2 trillion in cash and liquid assets stashed in corporate balance sheets here and abroad as well as additional trillions in savings parked by American consumers. News about unemployment is widespread, but the savings of employed Americans gets scant coverage. The federal Bureau of Economic Affairs reports the savings rate of Americans has risen from near zero in 2007 to 3% in 2008 and 5.2% today, now equaling over $600 billion in savings annually.
The key to putting this private cash to work is removing the festering uncertainty surrounding our federal fiscal crisis.
This crisis has been in the making for years and fixing it requires raising taxes not just on the wealthy, but across the board while cutting federal budgets substantially. Our national leaders, mostly smart folks, understand this but cower from their responsibility while hiding in the shadows of political rhetoric. Today, their weakness is the central problem paralyzing the economy as cash is hoarded in the face of Washington’s inability to act.
America needs leaders, of all political stripes, to accept responsibility for their accumulated budget deficits and enact remedies in scale with the problem. Tax reform, tax increases and budget cuts must come first, thus freeing Americans to look to the future knowing how much more of their cash, both corporate and individual, the government will take and how much will be left for investment and consumption that can reawaken the economy and create jobs.
Vermont’s Congressional delegation should reject President Obama’s American Jobs Plan. It’s a political prop diverting attention, effort and scarce tax revenues from the more essential task of right sizing our federal government and calming fears about a profligate and irresponsible Washington.
The President’s recipe for debt reduction or job creation are closing loopholes for oil and gas companies, eliminating tax breaks for corporate jet owners, raising taxes on hedge fund managers and limiting deductions for the “wealthy”, defined as individuals and families making over $200,000 or $250,000 respectively. The Office of Management and Budget (OMB) estimates these raise, over ten years, $40 billion, $3 billion, $18 billion and $400 billion respectively, totaling $461 billion or $46.1 billion per year on average. These are mouse meat solutions in relation to the size of the problem, equaling only 3% of the annual $1.4 trillion federal deficit.
Clearly, bigger sacrifices by Americans will be needed, both in terms of higher taxes and budget cuts. With Americans able to save over $600 billion annually during these tough times, it’s possible to raise taxes if done fairly, but pitting those earning more than $200,000 against the rest of us is more punitive theater than fair, especially when 47% of income tax filers pay no income tax at all.
Alternatively, eliminating 50% of the “Bush Tax Cuts” for everyone would raise $1.8 trillion over 10 years, or $180 billion annually - much more than the $70 billion a year in tax cuts for just the wealthy. In combination with modest limits on high income tax exemptions, $220 billion can be raised annually from income tax payers alone. This approach, both fair and painful for all, gives tax payers certainty and reduces fears that Washington will take even more.
Rather than trench warfare, I urge Vermont’s Senators and Congressman promote shared sacrifice and openly reject strategies, especially of their own party, that divide Americans into feuding camps. In the end, we all lose if the federal government can’t get its act together.
