Debunking the Republican Fiscal Platform

My friend Matt knows how to debate and argue. Here, he takes on the republican that has been duped into believing that the Democrat party's platform on fiscal policy is the demise of the American economy.

I imagine that some democrats hear republicans cling to the economy as the reason they want to vote republican. This dialogue offers many excellent arguing points. It is also extremely factual. If interested, I strongly suggest reading it because it's smart!

Republican:
The only reason I am against welfare and the progressive tax structure is because my dad is 70 and still wakes up every single day and does the job that is asked of him, while my mom is a retired teacher, yet still maintains a job to have an extra income for her family. I'm pretty sure they could be sucking the country dry like some people do on welfare, but they are working hard to maintain the American dream they have made for themselves. They are in a tax bracket where they are about to have to pay a lot more because of Obama's tax plan, so I am bitter for legitimate reasons. I took that status off for obvious reasons as many people have commented on it. I like everything else about Obama, but the economy is the largest issue for me and when my parents’ income is about to go down drastically I am not very happy.

Matt:
I understand this is personal for you. I did not mean to insult you, offend you, or convey anything less than my sincerest love and compassion. I support the Democratic party in general because ideologically I cannot justify living in relative affluence while there are still hungry, tired and poor; uninsured and unadopted inadequately cared for; sickness and ill health roaming the streets. I believe in the core concepts of self-reliance, but I also realize that unregulated capitalism fails to restrain the greed that would ultimately lead to the shrinking of our economy as a whole in addition to social crises similar to that faced in Europe in the 1930s.

I do not blindly acknowledge, however, that social welfare and tax credits are properly administered. There has never been a perfect solution to how such programs should be run, and there are many problems. It is my hope that by centralizing the administration of these programs the Obama administration is able to tighten control and increase accountability. I know that the popular opinion is that he favors unrestrained “hand outs” but that’s not what his rhetoric or record suggests. On the other hand I felt McCain desired to leave financial markets unrestrained, allow extreme upper-class wealth-consolidation to continue its disproportionate growth (CEO pay has increased an annual average of ~15% over the last 30 years as opposed to 2.5% for the average American worker), and refused to acknowledge federal responsibility for the administration of battling poverty. This includes leaving management of socio-economic programs up to states and private enterprise, which results in higher costs to the taxpayer, and less rigid management around the distribution of government funds; in short I do not believe this to be equitable. Part of the reason people in states like Pennsylvania have more faith in programs like Welfare than we do in Alabama is because the controls around distribution as administered by the state government in Alabama is so poor and inadequately maintained.

As for your personal situation, it’s my understanding that Obama’s tax proposals would create new tax brackets and only increase taxes on income earned in excess of $250,000 per individual. This would be $500,000 annually for a married couple filing jointly. I think there is sufficient misunderstanding among the American people when it comes to this; many seem to believe that the middle class will pay more than Obama promises. If we do, we’ll hold him accountable in 4 years for the promises he made and elect someone else.

I assume your parents retirement, however, is less of a tax concern and more of a concern over the economy. Having worked 4 years I built up a balance of $5,000 in my 401k by the end of the summer. I was fortunate to change jobs so my money wasn’t in the market when the first hits from the credit crunch happened, but I still lost $1,000 in October. I can only imagine the sort of losses that people who had worked for 30 or 35 years must have taken and how damaging that must be with a view to retirement in the near future. I personally believe that those losses on investment were a result of a lack of regulation in our capital markets and that the new government will work quickly to ensure this doesn’t happen again. To his credit, even George W. Bush has acknowledged that these measures are necessary in the current climate. John McCain, however, has stuck to the ideology of absolutism and maintained to the end that he would always be a free market economist.

Conservative economics believes that government can best support growth by shifting the balance of disposable income to the wealthiest corporations and individuals by way of lower tax rates at the top brackets. It takes the view that those who know how to make and have money also know best how to invest it on behalf of our economy. It seeks that even at lower tax rates, the investments that those individuals will make with their money will fund economic growth to an extent to make up for the lower tax percentages by way of absolute dollar value. It also has an undeniably and very American aspect to it – it’s up to you to decide how to invest your own money and it’s your right to keep a greater portion of what you earn. There’s nothing wrong with that, and in theory “supply-side” economics is great. I’ve never disputed that.

Theory, however, does not translate into practicality. Many in America today of great wealth have inherited that wealth, and as a result don’t personally know how to invest it wisely. They are able to hire the professionals that make up the remainder of the American wealthy to manage their portfolios for them. They are able to afford hiring the best and the brightest income tax advisers both as employees to manage their corporate tax and as personal accountants for their own income. They can take advantage of complex tax strategies that even I, as a CPA, would never think to come up with due to our overly complex tax rules. I once read that over 100 Fortune 500 CEOs making approximately $12 million per year paid $0 in federal income tax. Of the 2003 Fortune 500, 46 companies paid $0 in corporate income tax or received tax rebates from the federal government.

(Check this out … http://www.corpwatch.org/article.php?id=8110)

On the other hand, liberal economic theory believes that government can best support growth by leveraging more of American’s disposable income into spending. This includes both government physical spending as well as redistributing disposable income to those more likely to go out and spend it – the least wealthy Americans. When you give a rich man $1, he puts it in a savings account. When you give a homeless person $1, he goes and buys food, clothing, shelter, or unfortunately perhaps beer. Even if he goes and buys beer though, that dollar becomes divided up into funding the margins for the small business that owned the convenience store and the distributorship, paying the salaries of the gas station clerk, the bottler employees, and the brewery workers. It pays for managers and janitors alike, and enables the brewer to invest in expanding their business to increase their profits. The profits in turn make the shareholders more wealthy, and from a macroeconomic standpoint all of this leads to a growth in the economy.

What does this lead to in terms of securing a retirement for me in 30 years and for your parents much sooner than that? From 1994 to 1999 under Bill Clinton’s Democratic administration, the S&P 500 increased 351%. That effectively means that someone whose retirement would have earned them $100,000 a year in 1994 would earned them $351,000 in 1999. Under George W. Bush from 2002 to 2007, the S&P 500 increased 42%. That means that blue chip stock values, which a majority of your parents retirement account is likely invested in, increased almost 6 times as much during Clinton’s administration as it has during Bush’s.

I acknowledge that a lot of this is due to changing situations. President Bush has had to deal with 9/11, the fall of Enron/WorldCom, and Iraq. However, there is a reason that when you hear economists talk about the strength of the economy the first thing they mention is “consumer spending.” The way this is increased is by giving more disposable income to those likely to spend their dollars. We haven’t done that over the last 8 years, and now we’re paying the price. People don’t have cash to spend… as a result corporations don’t have cash flows coming in from operations and are having to dig us deeper and deeper in debt to foreign creditors just to pay their bills and payroll when people aren’t buying their inventory.

The reason people like George Bush and Dick Cheney – extremely wealthy upper class Americans – fight so hardly for conservative economics is not that they believe it works. George H.W. Bush called it “voodoo economics” in a primary debate with Ronald Reagan in 1980. They fight for it because they belong to a wealthy and elite class that doesn’t want to give up a single penny of their wealth because they cannot tangibly see how it benefits them. If you’ll notice, however, the extremely intelligent among the ridiculously wealthy (Warren Buffet, Bill Gates, the Kennedy’s) are all strong advocates of progressive (liberal) economic policy. They realize the cycle of the consumer spending and how that strengthens the overall economy.

What the conservative wealthy is do not realize that while they’re economic polices allow them to hold on to their earned dollars – the same policies make their dollars worth less. From 1990 to 2000, the relative strength of the US dollar against the British pound, German mark, Indian rupee, and Swiss Franc increased 17.4%, 31.7%, 56.7%. and 21.5% respectively while weakening (25.6%) compared to the Japanese Yen. To contrast, from 2000 to 2006, the dollar weakened compared to the GBP, Euro, Japenese Yen (17.8%), (26.4%), (4.2%), This essentially means that the purchasing power of $100,000 in 2000 was about 25% more in 2000 than 1990, but (15%) less by 2006.