Loading the Debt Problem onto the Backs of the Middle Class

From the fracas in Washington, it would be impossible to know that Americans still live in the world’s richest country. In 2010, the U.S. GDP was about two-and-a-half times that of its nearest competitor, China—you know, the country that’s building new cities everywhere and a bullet train system to ferry citizens among them. But to listen to the political discourse that currently dominates the airwaves, the U.S. is facing financial collapse, if not now then in another decade, and it cannot afford another dollar for many collective goods, whether an improved mass transportation system or health care for senior citizens.

As a number of commentators have observed, the political crisis over the debt ceiling is a distraction from graver and more urgent problems: especially the stagnation of the economy, which is not generating enough jobs to make much of a dent in the unemployment rate or to give young workers solid footing for the beginning of their career climbs. The Great Recession, supposedly over, is threatening to turn into a Japanese-style stagnation that could endure for a decade or more.

The state of the U.S. economy is bound up with the plight of the American middle class, as Robert Reich has acutely observed. That plight has been developing for decades, a lot longer than the debt problem, which dates back just a decade, to George W. Bush’s entry into the White House. The economic gains since the 1970s have been concentrated at the top of the income distribution, in the top few percent, and little has trickled down into the middle class. One widely cited statistic has it that the top 1 percent now take home about a quarter of the national income, up from just 9 percent in 1976;  the distribution of wealth is even more unequal. (By the standard statistical measure of income inequality, the Gini coefficient, the U.S. is now considerably more unequal than any other economically developed country and more resembles a developing nation like Nicaragua.)

The lack of economic gain by the middle class has fed directly into economic stagnation. In order to keep up their standard of consumption, many families have been going deeper and deeper into debt, encouraged in the last decade by the inflation of the values of their homes. The aggregate level of household debt in relation to GDP is higher than it has been since the Depression of the 1930s and is responsible for the weak demand that is keeping the U.S. from enjoying a robust economic recovery. Robert Reich’s basic message seems fundamental:  America has prospered when its middle class has done so; but their economic situation today is parlous.

The great damage of the current conflict over the debt ceiling is that it takes place, as Gary Fine rightly points out, on the terrain of conservatives. The Tea Partiers’ strategy of intransigence has worked. Accordingly, the discussion of remedies has been narrowed to the spending side: where are the cuts going to come from? Yet it isn’t that the federal government spends so much money, anyway. In 2010, the total level of spending of all levels of government in the U.S. amounted to 40% of GDP. That tied us with Canada but placed us well behind the levels of spending in Germany (44% of GDP), the United Kingdom (47%), and France (53%), all countries less wealthy (in terms of GDP per capita) than the U.S. As I noted in an earlier post, the increases in spending at the federal level under Obama so far are in line with those under Bush, with the exception of fiscal year 2009, a year of extraordinary economic turmoil that is divided between the two Presidents.

Not fully recognized is that a fall-off in government revenue plays an outsized role in the budget deficit. In nominal dollars, federal revenues today are about where they were in 2000, which means that in real dollar terms they are down by 16 percent. As a fraction of GDP, they have dipped to a level, less than 15%, that hasn’t been seen in six decades. The Bush tax cuts are an important part of the story, and most analyses point to them as the largest single factor behind the deficit. The recession and the halting recovery have also lowered federal revenues. Obama and the Democrats are right to insist that revenue increases must be a part of any solution, but in terms of the legislation under consideration to raise the debt ceiling this time around, they have lost the argument.

(And don’t listen to the right-wing whine that the affluent already pay more than their fair share in taxes. Conveniently for their argument, conservatives mention only federal income taxes, which amount to about 40 percent of federal revenue.  Almost as much is collected through payroll taxes, which, thanks to the cap on the income subject to Social-Security taxes, are mostly paid by ordinary workers.)

The resolution of the current tempest will last only for a while, six months if the Republicans are successful, eighteen if the Democrats are. The duel will be resumed, but we now see with clarity what the positions of the two sides will be. On the right, the prime target will be the entitlement programs, Social Security and Medicare, along with Medicaid, since the retirement of the baby boom over the next quarter century will ensure that the expenditures on these programs as they are currently configured will rise massively. On the center-left, the argument will be for more balance by raising revenues, but there has already been a concession that entitlement programs need to be cut back.

Any reduction in entitlement programs is equivalent to an additional tax on the middle class and the less affluent. For instance, Social Security is fully funded through 2037 because, since the Reagan administration, workers have paid extra amounts into the trust fund to build it up for the day when the baby boomers begin to retire. (The extra payroll taxes were recycled into the federal budgets of the time and spent.) To make the payments required in coming years, Social Security will need to go beyond incoming payroll taxes and tap into these savings, which effectively means that the money comes from elsewhere. Slowing down the rate of increase in Social Security payments to retirees, a proposal part of the Obama-Boehner negotiation, will slow down this transfer process and the need for more federal revenue. It will also give the retirees measurably less money over their lifetimes.

The debt ceiling crisis has pulled apart the curtains on a Washington political class that is at an impasse, unable to strike a “grand bargain” that would take the issue off the table. A “solution” therefore awaits the 2012 election, which may prove as momentous for the nation’s course as were the elections of 1980 and 2000. The Democrats under Obama’s leadership have given up considerable ground to the Republicans. But if the Grand Old Party takes the Presidency or the Senate while retaining the House, watch out!