Posted by: danielfee | October 2, 2011

2012: Will be a Watershed Year – Part 3

Part 3: Democratic Party Agenda

The other option that voters will have in the 2012 election is a Democratic party in which the majority still believes that government can and must solve big problems confronting society. Their agenda is based on the premise that the dysfunction of government can be fixed and that it is not necessary to tear it down to start over. There are a few in the Democratic party that have completely bought into the supply side theory. They are generally referred to as the “blue dogs” but for the most part the Democratic party still has a majority with a Keynesian economic philosophy. They also support the proposition that government must regulate industries, because if left to their own devises, private corporations will destroy themselves and the economy at large in an effort to maximize short term profits at the expense of long term stability. When this short term mindset causes an economic catastrophe, they will then seek taxpayer help to bail them out. The Wall Street collapse and subsequent bailout of the banks in 2008 being the prime examples.

Unlike the Republican party that is being pulled farther to the right by its fundamentalist TEA party wing, the Democrats are not being pulled to the extreme left by its liberal/progressive wing. President Obama will set the general direction for the Democrats in the upcoming election. However, unlike in 2008 when voters projected their own hopes and desires onto Obama, they will have his first term by which to judge him. If voters had paid closer attention to what Obama was actually saying in the 2008 campaign, they may have concluded that he was a pragmatic centrist who leaned to the left when it comes to social issues and is a centrist, or perhaps leans somewhat to the right, when it comes to fiscal issues. Through his first three years in office he has proven this to be the case. However, during this time the conservative media has portrayed him as the biggest tax and spend liberal of all time and the liberal media has portrayed him as a weak negotiator who is a sell-out to corporate interest. The truth falls somewhere in the middle, with his centrist approach attempting to balance the two ideological extremes. When you look closely at his record, Obama has adopted a mix of supply side and Keynesian economic policies, mixing tax cuts and spending increases in an attempt to revive the economy, which was in a very deep recession heading for a depression when he came into office.

The American Recovery and Reinvestment Act (stimulus bill) was Obama’s first big fiscal proposal and was adopted in February 2009. While being portrayed as a huge wasteful Keynesian policy, which conservatives claim has failed and liberals say was too small to be effective, it was actually a pragmatic mixed bag of supply side and Keynesian policies. Approximately one-third of the $787 billion was a tax cut for those making under $250,000 per year. Tax cuts are the primary tool of supply side economic theory. Approximately another one-third were funds provided to the states and local governments to fill budget gaps that were created by the decreasing tax revenues due to the recession and housing/real estate market declines. This allowed the states to balance budgets for the next couple of years without needing to resort to massive layoffs of public sector workers and adding to the rising unemployment rate. Today, now that these stimulus funds have run out, we are seeing the states and local governments making the big layoffs of public sector workers that would have occurred two years ago at the height of the recession. The last one-third was utilized for infrastructure projects. So one can make an argument that a larger portion of the stimulus funds followed the Keynesian economic model but an honest evaluation shows it was a mixed solution.

The argument being made by the Republicans that it was an abject failure is not supported by the facts. The reason most often sited by conservatives for its failure is that the unemployment rate rose above 8%, which was an arbitrary matrix assigned by those who were opposed to any governmental solution. First, Obama never said that passage of the stimulus plan would keep unemployment under 8%, and second the unemployment rate was 8.1% in February 2009, the month the stimulus bill was passed. A review of the monthly jobs numbers show a different perspective on the stimulus bills impacts. From January 2008 to February 2009 the year proceeding the adoption of the stimulus bill, the jobs report showed a net job loss of 4,148,000 private sector jobs and an addition of 196,000 government jobs. After the adoption, the net monthly loss steadily decreased and then turned positive by January 2010. From January 2010 through August 2011, the private sector added 2,611,000 new private sector jobs but 544,000 government sector jobs have been lost. But if you listen to the conservative media, you would think the opposite is true because they claim the stimulus bill failed and did not create any jobs except for government jobs. In addition to jobs, the stimulus bill also contributed to a significant turn-around in the real GDP (Gross Domestic Product) numbers. In 2008 the quarterly GDP showed a deepening recession, with the 1st quarter at -1.8%, 2nd quarter at 1.3%, 3rd quarter at -3.7% and 4th quarter at -8.9%. For the year of 2008 GDP was -0.3%. For the year 2009 the GDP was -3.5%, but the quarterly numbers (-6.7%, -1.8%, -0.7%, and 1.7% respectively) show a steady improvement throughout the year as the stimulus funds made their way into the economy. For the year 2010 the GDP was 3.0%. So the American Recovery and Investment Act played a large part in a 6.5% swing in the real GDP from 2009 to 2010, which I don’t think can be called an abject failure. However now that the stimulus funds have run out, and the prospect of no new stimulus funding being approved, the 2011 GDP numbers are showing signs of another slow down with a 1st quarter growth of only 0.4% and 2nd quarter growth of only 1.0%. Further budget cutting, especially in the short term, is likely to slow the GDP rates even further.

The Patient Protection and Affordable Care Act (Health Care Bill) derisively known by conservatives as Obamacare, is often cited as a massive new government entitlement program that will add to the federal deficit. In reality the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) issued their report on the effects of the legislation on the budget and found that incorporating the Senate’s revisions into the House passed bill would yield a net reduction in the federal deficit of $132 billion over the 2010-2019 period. However, based on the news coverage provided during the debate and the attacks on Obamacare after it was adopted, very few know that it actually will save money over the next ten years. They also do not know that the Affordable Care Act will save on Medicare spending by an estimated 2% in the annual growth rate of spending which has historically been around 8% growth per year for the past two decades. But if Obamacare will reduce the deficit and slow the rate of growth of Medicare, why do so many oppose it? The reason most often cited is the individual mandate, but this rationale for opposing it sounds like that of a petulant child yelling “you can’t tell me what to do”. But health care is different than other services. At some point in everyone’s life they will need to utilize the health care system. While it might be possible for many to pay for their routine doctors visits, very few can afford to pay for major medical expenses or emergency room visits due to accidents or serious illness. Currently hospitals do not turn people away for lack of insurance, so those who use emergency services or emergency rooms for their primary care without means to pay for it place an additional burden on those who pay insurance premiums and the taxpayers. Unless as a society we want to implement a national policy that the 50 million people without health care insurance can be legally denied medical care and turned away from emergency rooms and doctors offices, there needs to be some system in place to require everyone to contribute to the system. Obamacare provides for that so that everyone must make some minimum level of contribution into the system. In addition, it allows young adults to stay on their parents policy up to age 26, it closes the “donut hole” in the prescription drug coverage for seniors, and it prohibits the exclusion of anyone with a pre-existing condition from getting coverage. What is difficult to understand is why the government mandating that people take individual responsibility for their own health care is anathema to conservatives who profess that people should take more personal responsibility for their actions. It is even more difficult to understand their objection when you realize that it was the conservative Republicans in the 1990’s who were insisting that the Clinton health care proposal must contain an individual mandate. If the partisan rhetoric is removed and you analyze the projected impacts of reducing the deficit, reducing the rate of increase in Medicare spending and promoting individual responsibility, you might conclude that the Affordable Care Act is a conservative piece of legislation.

A review of Obama’s record on taxes shows that he has continued the supply side theory of lowering taxes as a means of economic stimulus. Contrary to what you hear from conservatives, unless you are someone who uses tanning salons, Obama has not raised your taxes. In fact he has signed off on numerous tax cuts and credits including: a two-year extension of the Bush tax cuts, a payroll tax holiday which reduced FICA deductions by 2%, expanded the earned income tax credit, extended and indexed the Alternative Minimum Tax patch, the Make Work Pay tax credit reduced income tax by $800 per couple for those under $150,000, suspended taxes on unemployment benefits, a tax credit for plug-in hybrid cars, tax credits for first time home-buyers, tax exempt bonds to expand industrial development, tax incentives for renewable and clean energy, a small business tax credit for the cost of health care for employees, up to $1 billion in tax credits to encourage investment in disease prevention, and health insurance premium tax credit for those earning less than four times the federal poverty level. As a result of these numerous tax cuts and credits, Americans are paying the lowest level of taxes since 1950. The analysis by the USA Today found that Federal, state and local taxes consumed 9.2% of all personal income where the historical average for the last 50 years was 12%. An analyst at the Center for American Progress compared the cost of Bush tax cuts in his first four years to the Obama tax cuts and found a surprising conclusion. The Bush tax cuts totaled $475 billion, or about 1.1% of GDP, and the Obama tax cuts totaled $1 trillion, or about 1.6% of GDP. In light of this data the question needs to be asked what is the real agenda of the TEA (Taxed Enough Already) Party? It cannot be that we are paying too much tax under Obama.

Many in the Democratic party have proposed, and Obama has stated his support for, tax code modifications which would close corporate tax loopholes, eliminate tax credits provided to corporations that move their operations offshore, or providing tax subsidies to highly profitable industries such as oil and gas. Obama has stated on numerous occasions that he is willing to support a lowering of the corporate tax rate to 25% from its current 35% provided that it is coupled with the closing of the corporate loopholes and tax expenditures. However, none of these proposals have been approved or implemented due to the unified opposition of the Republicans who are opposed to any proposal that would raise government revenues.

The total amount of Federal revenue received in both FY 2009 and 2010 was only 14.9% of GPD. Historically the average ratio of revenues to GDP has been 18.0% since 1950, which is the last time it was this low of a percentage of GDP. If the total revenues were to return to their historic level, the amount of the current budget deficits would be cut in half. Should the Democrats regain the control of the House, maintain the White House and obtain a filibuster proof majority in the Senate, then you could expect that there would be tax increases on corporations and the wealthy in an effort to return the revenue levels to their historic norms. Of course the counter argument from the Republicans is that you can not raise the taxes on the “job creators”. However there is no historical correlation between lower corporate tax rates and job creation. In 2009 corporations only paid a historical low of 6.6% of the total federal tax revenues and 5.65 million jobs were lost. Job creation is much more closely correlated to an increase in the demand for products and services than it is to a tax rate.

Even in his latest proposal, The American Jobs Act, Obama is once again mixing supply side tax cuts with Keynesian spending for infrastructure improvements. The initial analysis of the $447 billion dollar plan shows that about two-thirds is directed towards tax cuts and tax incentives and only one-third is directed towards rebuilding roads, bridges and other infrastructure projects. However, in todays hyper-partisan atmosphere in Washington DC, it is unlikely that any proposal will be approved before the 2012 elections, thereby leaving it to the voters to decide which direction to take when it comes to the governments role in job creation.

The Democrats in Congress have been pushing for their “Make it in America” agenda for the past few years in an effort to create jobs and rebuild the U.S. manufacturing base. In 2010 they were able to get a half dozen bills signed into law which included the U.S. Manufacturing Enhancement Act, which makes it cheaper for American companies to obtain the materials they need for manufacturing. The Protecting American Patents Act, which was intended to unclog the backlog of pending applications at the Patent Office. The Preventing Outsourcing Act which closed some of the loopholes that encouraged companies to send U.S. jobs overseas. The Small Business Jobs Act, which provided more lending and offered tax incentives to small businesses to grow and hire more workers. The Energy Jobs and Training for Veterans Act, which provides grants for on-the-job training and long-term employment in all energy fields. The America COMPETES Reauthorization Act, which established a Federal loan guarantee program for small to medium size manufacturers to invest in science, technology, engineering and math education. While none of these new laws have made a dramatic impact on the economy or the unemployment rate, there are other proposals in the “Make it in America” agenda that might have much bigger impacts. Some of the pending legislation includes: the National Infrastructure Development Bank Act, which would create a wholly-owned government corporation to facilitate the investment in and financing of infrastructure projects. Other infrastructure related proposals include the Build a 21st Century Surface Transportation System Act, Build American Jobs Act, and The Airports, Highways, High-Speed Rail, Trains and Transit Act. Of course each of these proposals would involve a significant level of government investment, but if implemented they will lead to an increase in jobs and provide a longer term benefit to the overall economy since infrastructure projects have a long useful life.

The Democratic “Make it in America” agenda also includes many other proposals that would be aimed at benefiting private sector corporations such as: the Permanent R&D Tax Credit, Patent Reform, Currency Reform for Fair Trade Act, The Innovative Technologies Investment Incentives Act, and many others that are targeted at supporting small businesses, creating clean energy jobs and innovative educational policies.

For many on the political right they will view these proposals as just another example of government interference into the “free market” system which should be allowed to determine when, where and if investments should be made in building the country’s infrastructure, or if innovative technologies in energy, medical research or other sciences are worthy of financial backing. For those on the left and many in the center, they will view these types of proposals coming from President Obama and the Democrats as the traditional role of government in setting the ground rules, directing investment into desired industries and technologies and building the backbone system that supports the entire economy.

This will be the other alternative voters will have in the 2012 election.



  1. Hi, thx for this article – really helpful!

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