Financing the Common Good

Robert B. Reich |
The American Prospect, February 1, 2008

Those of us who want to reverse America's most troubling trends -- widening inequality, increasing poverty, global warming, and a world grown increasingly unfriendly, to name a few -- cannot simply rely on election victories. A Democrat moving into the White House in January of 2009, coupled with a Democratic majority in Congress (let's even fantasize 60 votes in the Senate) is a necessary precondition. But electoral triumphs will not be sufficient. Recall that we had both at the start of 1993, yet too little was accomplished to reverse these trends. All are worse now than they were then.

1. Cleaning Up the Bush Mess

A new Democratic president will face many of the same challenges Bill Clinton faced at the start of his administration -- but all made worse by George W. Bush. Clinton, recall, inherited a fiscal straightjacket. At the start of 1993, the federal budget deficit was running $300 billion a year as far as the eye could see. Prior Republican administrations had sought to "starve the beast," going deep into the red by spending heavily on defense while at the same time cutting taxes.

A new Democratic president coming into office in 2009 will face a national debt much larger than it was in 1993. Despite the $5 trillion 10-year budget surplus that ended the Clinton years, the federal debt at the end of the Bush years will be almost $4 trillion larger than it was then. It will have grown about 70 percent during Bush's reign. If you assume 5 percent interest, the Bush debt burden will require the government to pay its creditors -- prominent among them, the Japanese and Chinese -- $200 billion a year, forever. That will use up a lot of tax revenue even before any of the nation's problems are addressed. In this way, George W. and company have done Reagan one better. They've not only starved the beast through tax cuts for the rich and increased defense spending; they've just about dismembered it. Even worse, and for reasons having more to do with sociology than economics, financial markets tend to be more suspicious of Democratic presidents than Republican ones. That means they'll insist a new Democrat embrace fiscal austerity more zealously than his or her Republican predecessor, as the price for lower interest rates -- as did bond traders and Alan Greenspan when Bill Clinton came to power.

By the start of 1993, Republicans had so demonized Democrats as "tax and spend" liberals that the public was conditioned to reject tax increases. Reagan had reduced marginal tax rates on the rich on the specious supply-side grounds that the benefits would "trickle down" to the rest of the population. They did not, of course, but by the time Bill Clinton became president the public had been reflexively conditioned to object to any tax increases on anyone. Clinton slipped through a modest tax increase nonetheless, just on the wealthiest 2 percent; it passed by a one-vote margin. Nowadays, the drumbeat against tax increases is louder still.
George W. Bush succeeded at reducing marginal taxes on the rich much further than Reagan, with the same supply-side argument, supported even by Alan Greenspan (although he claims he did so unwittingly). When the Democrats weren't looking, Republicans also convinced voters that the estate tax, barely affecting the richest 2 percent of Americans, was a "death tax" that would hurt the middle class.

Meanwhile, the fiscal demands facing a new Democratic president in 2009 are far greater than when Bill Clinton took office in 1993. Clinton's investment agenda in schools, job-training, health care, and infrastructure was badly needed then. Today, it's urgent. Inequality of income and wealth is wider and upward mobility has slowed. Our schools are worse than they were when Clinton became president, classrooms more overcrowded, and school buildings, falling apart. Job-training is almost nonexistent. At least 10 million more Americans lack health insurance than they did in 1993. Among the 13 wealthiest nations, America now ranks last or nearly last in infant mortality, low birth weight, and life expectancy. Some 5.3 million more Americans are living in poverty than when Bush became president. America's infrastructure is older and even more prone to breakage. From New Orleans levees to Minneapolis bridges to New York City's water lines, the nation is literally falling apart.

Add to all of this the pending retirements of baby boomers and the looming fiscal crisis of Medicare, which includes a giant subsidy to the pharmaceutical industry disguised as a Medicare drug benefit for the elderly. And the Alternative Minimum Tax about to hit the middle class unless a trillion dollars can be found somewhere. There is also the newly obvious need to support basic research in non¬fossil based fuels. Finally, and tragically, the war in Iraq will cost the nation billions more. Even if we were to withdraw tomorrow, the future costs of disability and health care for tens of thousands of wounded veterans, many with spinal and brain injuries, will be staggering.

The electorate, meanwhile, is more polarized than it was in 1993.
Washington is more partisan; ideological divides are deeper; Fox News and right-wing radio are more entrenched. Assuming that both parties will know their putative nominees by early February 2008, the American public will suffer nine months of mostly negative campaigning between then and Election Day, buoyed by more than a billion dollars of snarling television ads. It can be safely predicted that the person who emerges from all of this as president-elect will be so badly bruised that he or she will have little political capital to start off with. The traditional presidential honeymoon will be short-lived, if it occurs at all. There is, finally, in contrast to 1993, more cynicism about government's capacity to do the public's work. When Clinton took office, the institutions of government were battered but not beaten. Ronald Reagan had even added stature to the presidency although his policies detracted from the public good. The first George Bush was blandly ineffectual but left the presidency and the executive branch more or less intact. Clinton thereby inherited an office that still summoned public trust and a government apparatus that still commanded some respect. An incoming Democratic president, by contrast, will inherit a government widely perceived to be incompetent (Katrina, Walter Reed, Iraq, and Abu Ghraib, for starters). He or she will also take over a system of governance seen as wasteful and corrupt (noncompetitive bids for military contracts, cost overruns, multibillion-dollar subsidies to oil and drug companies, endless earmarks). The Bushes will vanish into history. But the stench they have created will remain.

In this way, the administration of George W. Bush has exploited the asymmetry in American politics. By trashing the institutions of government, the younger Bush personified his central thesis that government cannot be trusted to do anything well. He has shown that Republicans cannot lose at this game. There is no downside in treating government like a sewer. To the extent they have been careless or negligent with it, or crassly mendacious, illegally rewarding cronies and punishing opponents, splurging and plundering at every turn, they still come out on top. If, against all odds, a program or initiative somehow succeeds, they can show how wise they were all along. If programs or initiatives fail, as has been more likely, the failures only illustrate why citizens and taxpayers should not rely on government in the first place. Bush has thus enlarged upon the Reagan-era fiscal tactic of "starving the beast" of revenues into a more insidious strategy of starving the beast of public trust.

2. Gaining a Mandate

Facing these myriad obstacles, what is a new Democratic president to do? My suggestion: Do not wait until you are in office to build support for your highest priorities. Use the general election to highlight the things the nation must accomplish, and build your case. Bill Clinton's 1992 campaign aimed at so many different issues and objectives that the public was confused about Clinton's priorities once in office. This undermined whatever mandate he might have had for doing anything other than fulfilling Ross Perot's and Alan Greenspan's desire to reduce the federal budget deficit. Clinton's 1996 campaign emphasized school uniforms and V-chips to protect children from sex and violence on TV -- in short, it gave him no mandate to accomplish anything very important in his second term, even though the budget moved into surplus and he finally had the resources he needed to fulfill his first-term agenda. This lack of mandate, coupled with the widening surplus, allowed the Republicans to make a tax cut the most appealing alternative.

Beyond specific policies, give us a sense of where you want to take the nation so there's a reason for your presidency larger than any particular initiative. Connect the dots. This was Clinton's strong suit in the 1992 campaign. He spoke of giving Americans the tools they needed to succeed in the new global economy, the security they needed in order to be able to navigate the inevitable changes ahead. You should also talk about building the economy from the bottom up by making Americans more flexible and productive -- in contrast to the Republicans' failed strategy of building it from the top in the hope that tax cuts for the rich trickle down. Americans know what's happened. Median wages remain flat while almost all the growth has gone to the top. The typical young man in his 30s today is earning 12 percent less than his father earned three decades ago, adjusted for inflation. Americans want an economy and a society in which their children will do better than they do.

Once in office, pay careful attention to the priorities you've campaigned on, and look for ways to dramatize and reaffirm your overall vision. You won't have the luxury of squandering any morsel of political capital. You can't grapple with the equivalent of "gays in the military," as did Bill Clinton, inadvertently, at the start of his administration. Begin promptly with your most important agenda items, and don't raise secondary issues, such as Clinton did by pushing for the North American Free Trade Act. You won't have the time, or the public's trust, for such digressions.

In everything you do, emphasize and illustrate competence. Appoint people who palpably take government seriously. Avoid even the suggestion of cronyism. Give the public specific benchmarks for how you, and the public, will be able to judge whether an initiative is succeeding and, hence, whether tax dollars are being spent wisely. If a program or an initiative fails to meet the benchmark, end it.

Increase the staffing of regulatory agencies charged with protecting the public, and appoint regulators who believe in protecting citizens. See to it that corporate lawbreakers are prosecuted vigorously. There is no better means of demonstrating to the public why government is necessary and, not incidentally, that you are not in the pockets of the powerful. Crack down on unsafe products, sweatshops, consumer fraud, bribery, the looting of corporations by executives, illegal firings, sexual harassment, oil spills, predatory lending, insurance companies that fail to honor their policies, underfunded pension plans, corruption in the awarding of government contracts. Protect corporate whistleblowers. Publicly castigate CEOs who endanger or defraud the public.

Finally, support democratic reforms -- for example, full public financing of elections, far stricter limits on when ex-members of Congress may lobby their former colleagues, full disclosure of who bundles contributions and from whom, and blind trusts through which all campaign contributions must pass (thereby preventing candidates from ever knowing who contributed what). Be willing to fight Congress and the special interests for these and other reforms. Your pollsters will tell you the public doesn't care about these because the public is already so cynical about politics. Your pollsters are wrong. If you want to accomplish anything really important over the long term, you must re-establish Americans' trust in our democratic process. That trust -- the inverse of what George W. Bush has left us with -- may be your most important legacy.

3. Paying for it

You won't raise nearly enough revenues merely by rolling back the Bush tax cuts for the rich. Responding to all the deferred needs of the nation will cost several hundred-billion dollars more. Where to get the additional money? Three sources: The peace dividend from ending the Iraq War, a more progressive tax, and modest deficit spending. Because many of America's deferred needs are felt so directly by a large majority of citizens -- health care, early education, child care, training for good jobs, better public transit, and so on -- you can gain support for additional revenue if you educate the public about what you're doing and why.

Start with the peace dividend. According to government figures, the wars in Iraq and Afghanistan have so far cost the United States more than half a trillion dollars. Another four years would cost significantly more, because this figure doesn't include the ever larger costs of recruitment or the cost of replacing the equipment that's been used in the war so far. If you ended the war, it's safe to say that the peace dividend would be more than $100 billion a year, even including the costs of attending to our wounded.

The only people who have the money necessary to reverse the nation's troubling trends are at the top. Recent data from the IRS show that the wealthiest 1 percent of Americans are earning more than 21 percent of all income -- a postwar record -- while the bottom 50 percent of Americans combined are earning just 12.8 percent of total income. (Right-wingers have attacked these data by arguing that the IRS improperly counts adjusted gross income, but however you try to bend the numbers the trend is unmistakable.)

Explain to the public that even as income and wealth have become more concentrated than at any time in the past 80 years, those at the top are now taxed at lower rates than rich Americans have been taxed since before the start of World War II. Taxpayers who bring home over $5 million annually now pay less than 22 percent of their incomes in federal tax, on average. Managers of hedge funds, private-equity partners, and many venture capitalists are paying no more than 15 percent -- since their earnings are, absurdly, treated as capital gains. This means that America's wealthiest, who have been receiving most of the economy's bounty, are paying a smaller percentage of their income in taxes than are middle-class Americans. Financiers who are raking in hundreds of millions -- last year, each of the 25 highest paid hedge-fund managers took in an average of $560 million -- are paying at a lower rate than many of America's working poor who barely clear $20,000 annually.

How to sell a higher marginal tax on the wealthy? Emphasize that there's no way the country can do what's needed unless more money is raised – and yet, if the rich don't pay their fair share, the burden will fall on a middle class that's already financially strapped. By the same token, only a relatively few at the top would need to pay more. According to the Institute on Taxation and Economic Policy, if the marginal income tax rate on Americans whose yearly income exceeds $10 million were raised to 70 percent, and the rate for those who earn between $5 million and $10 million a year were raised to 50 percent, federal revenues in 2008 would increase by $105 billion. By my calculation, a tiny annual wealth tax of one-tenth of 1 percent on all net worth exceeding $5 million -- a tax that would affect only 50,000 households, or fewer than one-tenth of 1 percent of the nation's taxpayers -- would yield an additional $100 billion.

Point out that a progressive income tax has been a cornerstone of our fiscal system since 1913 -- and our current non-progressive and often regressive tax is the anomaly. In World War II, rich Americans paid a marginal rate of over 68 percent of their incomes in federal taxes, even after exploiting every tax loophole they could find. In the 1950s, under Dwight Eisenhower, the highest marginal rate was over 90 percent, and even after using all the deductions and credits, the rich paid almost 52 percent.

In addition to re-establishing a progressive tax, you'll need to wean the public -- and your fellow Democrats -- off the false notion that fiscal austerity is necessarily good for the economy. Explain the difference between public spending that builds the future productivity of the nation's workforce -- spending on education and infrastructure, for example -- and spending that improves today's living standards. Borrowing in order to accomplish the former is wise because it enhances the capacity of the nation to produce goods and services, and thereby shrinks both the deficit and debt as percentages of the total economy. By analogy, while it makes no sense for a family already in debt to borrow more money to finance a cruise, it makes eminent sense for it to borrow more in order to send a child to college. Illustrate this point in your annual budget. Separate such "investments" from ordinary spending. Insist that annual spending not exceed annual revenues, but judge investments by their potential for growing the overall economy and be willing to borrow in order to finance them.

Finally, even before submitting your first budget to Congress, offer the public specifics about how much your priorities will cost, along with the cost of other major government programs. Break the budget down into categories the public can understand rather than those encoded in appropriations committees: Social Security and Medicare; defense and homeland security; health care; roads, bridges, and other infrastructure; education and basic research. This will help push Republicans into a debate over what the public needs, rather than over the size of government or amount of taxes. It will also help you build the case for raising taxes on the super-rich -- not as an end in itself but as a means of accomplishing what the nation must do without adding to the tax burden of the middle class.

4. Leading

Cleaning up the Bush mess, building a mandate, and gaining public support for paying for what needs to be done will require skillful leadership. But neither of the two models of presidential leadership in recent years will suffice. Under one model, presidents lead by finding the putative "center" through a seemingly endless process of polling. After the stunning Democratic defeats of 1994, Bill Clinton turned much of the apparatus of policy-making over to his pollster, Dick Morris. But leading by polling isn't leading; it's pandering. Most of the public doesn't know exactly what it wants because it hasn't had the time or energy to find out; its so-called "opinions" typically reflect no more than what it's heard from an opinionated columnist or talk-show host. At this perilous juncture in
America's history, you dare not lead by polling. There's no "center" with a clear-eyed view of what must be done.

Under the other model, presidents decide what's good for the public and then try to sell, cajole, intimidate, or lie their way toward gaining public support. George W. Bush didn't waiver in any of his beliefs, including the wisdom of his supply-side tax cuts for the rich and of invading Iraq. But leading by fiat isn't leading, either; it's bullying.
It's also profoundly anti-democratic. Worse yet, it leads to large errors because a president who's dogged in pursuit of his goals is often incapable of hearing evidence that shows those beliefs to be mistaken. If you choose this model of leadership, you subject the nation to grave danger.

But you needn't choose between pandering and bullying, between trying to please everyone and refusing to consider contrary opinion. Especially now -- given what the nation faces in the years ahead and given the mess you've inherited -- you must lead by making your case to the public as strongly as you can but then listening carefully to what the public and its representatives say in response. Be bold, but be willing to modify if facts and conditions change. Be clear about where you want to lead America, but reconsider if the public will not follow. Come down hard on adversaries but don't mistake disagreement for craven opposition. In other words, enter into an ongoing dialogue with your public. Educate them, but be humble enough to be educated in turn. That's the only way to preserve and build the trust in your leadership.

Given the difficult hand you've been dealt, it's your only hope for success.