Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, July 07, 2011

The Republican Crisis

There is an article in The Economist (see link here), in which they lay the blame for the failure to resolve the deficit reduction dispute (and the related debate about the debt ceiling) squarely at the feet of the Republican Party and their refusal to consider tax increases as part of the response to the current accounts problem. This is surprising because The Economist is normally squarely on the right side of the political spectrum with regard to fiscal and economic policy. I would go further than The Economist though. I would say that not only is the Republican Party responsible for failing to solve the problem, they are responsible for creating it in the first place. Furthermore, the lack of sophistication among the national press corps has allowed the Republicans to frame the situation as an existential crisis by making baseless comparisons between the US debt and Greece's debt. At the same time, there is very little coverage of how low our tax rates are relative to other industrialized countries and relative to our own past.

According to The Economist article above, US tax receipts as a share of GDP is around 15%. To put this in perspective, I looked at the tax receipts data from the OECD (see data sheet here). The numbers from the OECD are a little different than those quoted in The Economist. OECD says that tax revenues as a share of GDP are at about 24%. According to the OECD, 24% is the lowest share of the national economy taken in taxes in the USA since 1965 (the first year for which data is reported in the table). What's more, 24% is among the lowest share of GDP taken in taxes for any OECD country since 1965! Only relatively poor OECD members such as Chile, Korea, Portugal and Turkey have lower tax/GDP ratios in their history. What's more, these countries' lowest tax/GDP ratios occurred when they were better considered as developing countries than wealthy industrialized countries (and in the cases of Chile, Korea and Turkey largely before they were democracies). Many of the countries that have similar or superior growth rates to the US tax their economies more heavily. So contrary to Republican rhetoric, we are not over taxed by any meaningful measure. At the same time, Republicans are also on thin ice when they argue that increasing our tax rates will undermine the overall economic health of the country.

What about our spending levels? According to, the US government budget takes up about 21% of GDP. The Economist says that number is about 25%. Regardless of which figure you use, that's much lower than most industrialized democracies. So it is not the case that our spending per se is especially high or "out of control" relative to our peers. Again, the Republicans are distorting the real situation to make their case for protecting low tax rates the wealthy and corporations at the expense of public services that benefit society as a whole (like education, health care and infrastructure).

What about our debt levels? To hear Republicans talk about it, the United States is a global laughing stock because of our debt levels. Even if we accept the Republican premise that we couldn't solve our debt problem overnight by returning our tax rates back to the 1990s levels (27% to 29% of GDP), are we really in the midst of a crushing debt crisis? According to the OECD (see link here), our debt as a share of our GDP is at 74% for 2011. To put this in perspective, that's about the same debt level as found in Ireland, Portugal which are in fiscal crises but lower than Belgium (80%) and Japan (127%) which, because they are larger more advanced economies, not in fiscal crisis. Greek debt is at 125% of their GDP.

It's worth pointing out here that a number of countries that Republicans love to vilify for their supposedly budget busting welfare states have much better debt situations than we do with little to show for our borrowing other than a bloated military. Denmark's debt is only 2.7% of their GDP. Canada's is 33.7%. Germany's is 50.2%.

For all these reasons, I think we should think about the current situation with regard to taxes, spending and debt as a "Republican Crisis," rather than a genuine "Debt Crisis."


USWest said...

I completely agree, RBR. And both you and the Economist make a very good case for why. THe problem is that most Americans don't understand the tax/GDP ratio and they aren't patient enough to listen to the explanation. Not only is this due to unsophisticated media, but to an educational system that doesn't prepare our population to really understand these types of situations.

The problem for the Republicans are out of arguments to keep subsidizing the wealthy. This crisis has shown that the emperor has no clothes. Trickle down has failed. We have a "trickle up" economy instead. The Republicans vilify to poor because they are "lazy", forgetting that the working poor can't get ahead period. THe Middle Class is waking up to the burden that is being placed on them.

So they only thing left for the Republicans to do is demonize the middle class and the institutions that maintain a middle class.

All of this is well and good. But at the end of the day, if the voters keep putting Tea Partiers in office and watching FOX and subscribing to nationalism nothing else will matter. Bottom line: Politicians only care about re-election, they gave up on the American people ages ago.

Raised By Republicans said...

I think your final statement glosses over the significant differences between the two major parties. The policies espoused (and enacted where possible) by the Democratic Party are much friendlier to the kinds of middle class supporting institutions you refer to (public education, unions, social security, medicare, progressive taxation, etc).

USWest said...

Yes, the Democrats have much better policies, which is why I vote for them. My final statement was more squarely aimed at Republicans, the party of ME, ME, ME!

At this point, I have a tirade I'd love to launch against the Republicans and their Tea Party ilk. But your post was very substantive and I don't want to ruin it by doing that.

I fear that we will default simply because these guys will loose control of the situation. So if this is for drama, they are really playing a dangerous game.

I hear Obama is exploring his options to see if he may be able to act unilaterally with an executive order or some other like instrument.

USWest said...

Another Thought:

I don't think the Republicans are really interested in balancing the budget or bringing down the debt. They want to "shrink" government. The idea is to starve it dry. It's the same problem we see in California. Obama and Brown have a lot in common these days. Republicans want a revenue neutral solution to the problem. No New Taxes. No Tax increases. Even Bush 1 had to go back on that famous pledge and he lost the election. This is al Republicans see. But their response just isn't logical. Inflation affects government purchases and expenses just like it does individual households. Not all of our spending and borrowing is due to irresponsibility. The weak dollar accelerates this process of rising expenditures.

There are more retirees, therefore, Social Security costs will go up. Medical care is in crisis, so Medicare costs are going to go up. People aren't working due to a lack of stimulus, jobs aren't being created. This means payroll and income taxes aren't being generated. It isn't hard to understand the problem. So you have to have some revenue changes. You can and should cut. But I agree with the President that you need to eliminate deductions and then lower over all rates for everyone. We need to reward savings. We need to reward those who leave their money in the US rather than moving it offshore. THe incentive system created by the tax code is completely contrary America's stated values, We should encourage higher interest rates on savings accounts and vehicles and start charging taxes on interest earned from investment income. But the last thing the Republicans want is to give up money earned through risk-taking rather than hard work and discipline.

The only good welfare is corporate welfare. As for small businesses, you'd help them a hell of a lot more with a single payer model for health care. But the Republicans hate that, too. It's too "socialist". What they want to do is break the strongest Democratic lobbies- Unions and the AARP. Then they and their interests can have free rain. I see all of this as politics and the people be damned. It's Ayn Rand capitalism. That, I really believe, is their goal. Only the deserving should be considered and protected.

Now, I think there is a potential bright side and it will come from the constitutional crisis that will occur if we default. If we default, social security and medicare payments won't be made. Obama can stand up and say that by executive order, he will impound all the funds s needed to to meet these obligations and pledge that America will pay all its debts. Then he can sit back and watch as the Republicans challenge him in the Supreme Court and accuse him of power grabbing. I say, go for it good Patriots. If Obama and the Democrats play their cards right, can come out looking very good.

As for military expenditures: I agree they are bloated. And I am glad for From Sec. Gate's openness about the need for cuts. But I am equally glad that he berated the Europeans and other NATO members on his way out for failing to meet their full NATO obligations and then expecting the US to pick up the tab. We pay a high price for their security. Geeze, they can't even handle Libya on their own. The Economist reported that Norway will stop its bombing in Libya Aug 1 because it is running low on arms and that only 4 of the NATO members current spend the NATO required 2% of GDP on defense. One of those is Greece, by the way.

Raised By Republicans said...

US West,

I think you are right about the motives being government elimination more than budget balancing. I really think the cynical goal of the party leadership is a return to the days of Robber Barons and out of control Trusts.

USWest said...

The other part of the plan is to direct everything back to the states. The Republicans must feel that they have a better shot at taking over and controlling state assemblies and governorships than at the national level.

They want to keep the economy in the doldrums so that they can use it against Democrats in the fall. See, those Democrats are at fault! It's a bad gamble on the Republican side because once those Florida retirees don't get their checks, just wait and see who gets blamed.

Raised By Republicans said...

Many of the states have balanced budget requirements in their constitutions that prevent them from or at least restrict borrowing during economic downturns. Republicans may be figuring that the game is rigged in their favor at the state level.