A vision for long-term progressive victory, aka, how we can pay for the new social investment economy:
1. The New Social Investment Economy
A decent description of the new social investment economy was actually presented today by President Obama in his economic speech. In short, it means providing a stronger foundation for our economy through increased financial regulation, along with increased public investment in education, renewable energy, and health care that will allow our nation greater protection from the ups and downs of financial speculation. President Obama depicted this new economy as the centerpiece for his vision of economic recovery:
It's a foundation built upon five pillars that will grow our economy and make this new century another American century: new rules for Wall Street that will reward drive and innovation; new investments in education that will make our workforce more skilled and competitive; new investments in renewable energy and technology that will create new jobs and industries; new investments in health care that will cut costs for families and businesses; and new savings in our federal budget that will bring down the debt for future generations. That is the new foundation we must build. That must be our future - and my Administration's policies are designed to achieve that future.
Yes! I agree completely with this vision. In this passage, President Obama articulates it about as well as any Democrat I have ever heard. This is, of course, probably why he is the President of the United States. Providing improved health care, education and energy resources will give everyone in this country a more solid economic foundation. Increasing financial regulations will provide additional protection from the spread of dangerous malfeseance of the sort that led us to this crisis. And reducing debt long-term just makes sense, since money spent on interest to the debt is not a very beneficial form of public spending to the population at large.
2. How much will the new social investment economy cost?
Public spending for Fiscal Year 2009 will reach 44.7% of GDP. Even with bailouts and wars removed, public spending will still have reached 40.0% of GDP.
This percentage represents an all-time high outside of World War Two. It is a sharp increase of 7.0% from fiscal year 2000 levels. This is largely due to the increased public expenditures of the stimulus package, but also partially due to increases in expenditures from Social Security, Medicare, and non-war related military spending.
Maintaining non-bailout, non-war related public spending at 40% of GDP is the minimum amount required to achieve the new social investment economy President Obama describes. Such an amount is still noticeably lower than public expenditures as a percentage of GDP in Western Europe and Canada, but after 33 years of stagnation it would represent a major, generational step in the right direction for America. It is the target we need to achieve.
3. Where we get the money.
Now, with a 40% social investment economy, even if we eliminated all of the Bush-era tax cuts, public revenue would return only to pre-Bush era levels, which is about 34-35% of GDP. This leaves us with a sizable deficit equal to 5-6% of GDP, and does not put the new social investment economy on stable footing over the long-term. We can't permanently have a deficit if we want the new social investment economy to survive.
In his speech today, President Obama identified potential revenue sources that go beyond pre-Bush era levels. These include a 100% cap and trade system, bringing down health care costs, saving money on defense procurement, and closing tax loopholes:
But the only way to truly spark this transformation is through a gradual, market-based cap on carbon pollution, so that clean energy is the profitable kind of energy.(...)
We have announced procurement reform that will greatly reduce no-bid contracts and save the government $40 billion(...)
[P]assing health care reform that brings down costs across the system, including in Medicare and Medicaid.(...)
And we should restore a sense of fairness and balance to our tax code by shutting down corporate loopholes and ensuring that everyone pays what they owe.
As helpful as this would all be, it does not represent of 5% of GDP, which is the minimum amount of extra revenue needed to balance the budget in the new social investment economy. Best case scenario, a 100% cap and trade auction would generate about $300 billion, or 1.5% of GDP, by 2020. Unfortunately, we are more likely to only get 24.5% cap and trade by 2013, as per Boxer-Lieberman-Warner. Additionally, we can probably get another 1% from the loopholes and procurement reductions combined. However, that still leaves us short a minimum of 2.5%, and more likely in need of another 4.0%. As such, some other form of revenue generation will be necessary.
This is where eliminating the income cap on Social Security taxes comes in. Social Security taxes represented 35.2% of federal revenue in 2007, or $949.4 billion. In fiscal year 2005, households with incomes over $100,000 a year represented 32.58% of all household income. While some of that income is already subject to Social Security taxes, at least 40%, and more like 80% of it, is not. As such, completely eliminating the income cap on Social Security taxes should generate additional public revenue between 1.5% and 2.0% of GDP. This brings us pretty close to the necessary 40%, and allows the remaining 0.5%- 2.5% to by made up by state and local governments.
On their own, eliminating Bush era tax cuts, establishing cap and trade auctions, eliminating tax loopholes will not generate the needed revenue to sustain a 40% social investment economy over the long-term. However, those measures, combined with completely eliminating the income cap on Social Security, just might do the trick. Best of all, slowly raising the cap to the point of elimination is a popular measure, opposed by only 30% of the country (see the June 15th, 2005 CBS poll on the subject). Certainly, it is going to be a lot more popular than cutting spending as a percentage of GDP, something which no administration or Congress has ever really accomplished over the long-term, despite their constant rhetoric on the matter.
Matt Miller thinks that President Obama should come clean with his inevitable plan to raise taxes since, like me, Miller considers long-term spending reductions outside of bailouts and wars highly unlikely. My only problem with Miller's analysis is that I think Obama already has come clean. While today President Obama sounded the familiar political rhetoric of spending cuts that has always proven futile in the face of Wagner's Law, the truth is that President Obama promised to raise the income cap on Social Security taxes during his campaign. In other words, there is no secret plan to raise taxes: eliminating the Bush tax cuts, instituting a 100% carbon auction, and significantly raising the Social Security income cap are already the very public Obama administration plans to raise taxes.
Now the Obama administration might not be able to pull off a 100% cap and trade auction, and might not be willing to eliminate the Social Security income cap altogether. However, if we can help, and push, the administration achieve these two goals over the next four to eight years, then the 40% social investment economy will become secure.
Paying for the new social investment economy might be the biggest political fight of our time. Fortunately, it is a winnable fight, and progress is already being made. Victory really is within our grasp over the next few years. |
