Wednesday, February 23, 2011

Current Republican Strategy

I want to congratulate the Republicans. They have finally gotten us to where they want us. They have created budget deficits so large they can with a straight face abrogate workers’ rights, rend great gaping holes in the peoples’ safety net and say “It’s the only way. We have to do it.”

Step One: Create the mess.

Have Republicans gotten us to this point through stealth measures? Hardly! They have forthrightly cut taxes again and again and again. The Democrats, including the current president and last Congress, have been complicit. Where Republicans have pulled the wool over gullible eyes is their claim that lower taxes lead to an increase in tax revenues. Each taxpayer will get to keep more, but the economy will grow so much we’ll make it up. Not going to happen – at least not at the level of tax rates in this century.

The intellectual bulwark for this thinking is the famous/infamous Laffer curve, which suggests there is an optimal tax rate where anything lower or higher will result in lesser total tax revenue. Common sense says the Laffer hypothesis is correct. At a 0% tax rate, the government gets no taxes—and there is no government. Everyone is on their own and must fend for themselves. At 100% the government gets (and therefore spends) everything. Under that circumstance people will only work as much as they are required and no more. There is so little extra benefit to the person who makes any extra effort as to make it improbable.

Starting with a 0% tax rate and slightly increasing it will not cause anyone to work less. As a result tax revenues go up. All that happens is the government decides how to allocate a larger percentage of the GDP. As the tax rate increases, it becomes marginally less advantageous to work an extra hour or make an investment, and so work and investment starts to decrease. Starting with a 100% tax rate—where the government controls all spending in the economy—at some point as tax rates decline it becomes “worthwhile” to do extra work because you have left-over compensation you can decide how to spend rather than having the government decide.

In between those extremes is the optimal—the maximal tax revenue under the Laffer curve.

Who can argue? Well economists, of course, but the general concept certainly makes sense.

Republicans fundamentally believe government should be smaller—yet people like things governments do, like plowing roads when it snows, providing police and fire protection, etc. Since Republicans were unable to shrink government when the Democrats were in charge, and refused to shrink government (and actually increased its size) when they were in control, they needed to find another means. Starving government of funds is the method.

To justify cutting tax rates, Republicans have claimed without factual evidence (and even despite factual evidence of the effect on income after the Regan or Bush tax cuts) that the US is in the portion of the Laffer Curve where decreasing rates will increase tax income. Therefore, they say, cutting taxes will increase tax revenue. Democrats have not been forthright in proclaiming the tax-cutting-king has no clothes and have gone along with a series of tax cuts. The result has been (drum roll please) decreased tax rates and decreased tax revenue.

So, at the same time Republicans drove through tax cuts, they increased government spending in many areas including the two Bush-inspired costly wars we are still fighting.

The most recent recession arrived and Americans (are you surprised?) looked to the government to stabilize the economy, which it did first under Bush and now under Obama. Once that money was spent and after it became apparent that we would not spiral down into another Depression, Republicans and many Democrats began saying it was ill-spent money—regardless of analyses by independent economists that showed how badly the US economy would have been hurt had the money been withheld.

Step 2: Abrogate Workers’ Rights

Individuals who wish they could live above their means (and many Americans did for decades) now tell all who ask them in surveys that Government must live within its means. They tell government they are overtaxed (a clear Republican victory in message success). They also tell pollsters that they don’t want their entitlements cut (not so good for the Republicans, which is why they need a crisis).

Well that equation does not work, but Republicans don’t want to admit that quite yet. Instead, they are pressing hard for long-term gains on other pet issues. Labor is taking it on the chin. In Wisconsin Republicans are not satisfied with cutting salaries and benefits of unionized government employees; they want to eviscerate the unions. The stated reason? In order to meet the crisis we must allow governmental leaders to take whatever actions they deem necessary. “We’re broke,” Gov. Walker said. “You can’t really negotiate when you don’t have money to negotiate with.”

Baloney. Wisconsin has money—not as much as perhaps it wishes it had, although the Republicans did recently approve a tax reduction for businesses—but more than enough to pay some number of state employees some level of compensation. That’s what bargaining is all about. Bargaining is a process that helps divide the limited pie. As another example of this self-induced problem, many states have purposefully underfunded their pension plans in order to balance budgets and, by golly, now the plans are “broke” and darned if the overpaid employees didn’t cause the problem. Gosh, I am so surprised.

I am not about to suggest that the public unions have not made use of their structural advantages. Unlike private employers, it is much less likely their employer can go bankrupt because of an overblown cost structure. Because of that advantage, I suspect (and some studies have shown) that public employees enjoy an advantage in wages and benefits compared to their nonunionized private peers. I will also agree with those who suggest that the rigidity of many civil service rules is a barrier to more efficient government.

The problems did not arise overnight, nor should we attempt to fix them with the flash of a current legislature’s pen.

We need considered solutions, not slash and burn tactics primarily targeted at the other party’s favorite constituents—in this case the Republicans trying to take out Democratically leaning unions.

We need people talking with each other to develop long-lasting solutions. The current crop of extreme Republicans is little interested in compromise. They have won their majorities (overwhelming according to them—at the margins of the swing independent voters according to me) and will do the “will of the people.” We’ll see if that’s true, but Step two is in full play.

Step 3: Eviscerate the Safety Net

Simply destroying unions is not these extreme Republicans’ ultimate objective. They use an us-versus-them approach. Today it’s “The Taxpayers” against public employees. Even if the Republicans win everything they want, it won’t be enough to balance the budgets. Tomorrow it will be “The Taxpayers” against the “entitled”—whether the “entitled” be poor, unemployment, ill or superannuated.

If those with money must not be tapped for the common weal, this simply comes down to a rich man’s game: The rich want to keep all they have and get more. To accomplish that, the middle and lower classes must suffer.

Congratulations again to the Republicans; the stage is set for you. Something you extreme Republicans should keep in mind: the pendulum swings. You are about to give it one heck of a shove. What will happen when it comes back the other way?

~ Jim

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