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The American Economy In Big Trouble–Part I, Background

February 11th, 2010 · No Comments · Economics, Politics

A little history. In 2000, George W. Bush was elected President of the United States and took over in January 2001. Within days of taking office, Richard Cheney had already held a meeting concerning energy, which to an oilman means oil. He had a meeting on drilling for oil. Not here in the United States, but in Iraq.

The only problem was that Iraq was a sovereign country and it was run by a vicious dictator who had been definitively defeated in a war against George W. Bush’s father. In what would be called by many an act of revenge against a man whom we are told tried to have George H.W.Bush assassinated. Of course those who happened to see a map of Iraq with different parts of the country marked off and the oilfields assigned certain names have caused some people to think that Bush and Cheney were planning to attack Iraq.

If they were planning such an attack it was diverted and delayed when, on September 11, 2001, 19 Muslim extremists flew planes into the World Trade Center. It set back their plans for two years while they both planned and executed a campaign against the headquarters of the group, Al Qaeda, in Afghanistan and became involved in the details of a recession partially caused by the results of the 9/11 attacks.

As the economy did not recover as rapidly as they hoped and as jobs lagged even further behind, their Federal Reserve Chairman continued to hold interest rates low and keep the money supply plentiful. With very little manufacturing left in the country and with real estate schemes planned around the low interest rates, the housing market boomed. Wall Street devised a plan to offer protection for mortgages and turn these writs into bundled investment instruments based on securing the mortgages.

The fact was, however, that the instruments were only as good as the real estate and offered no protection. They were clearly worthless and so when the housing boom abated and values began to turn down, the documents, designed to protect mortgages against default. It didn’t work and not only did mortgages begin to default in record numbers, but also the credit default swaps, having no value, caused the entire financial structure to suffer huge losses. In short order, the stock market collapsed, and as we now know, 15 million workers were eventually laid off. It was the worst economic collapse since 1929.

So where are we and what do we do? It isn’t easy and it isn’t simple.

Thanks to the collapse of our economy in 2008…may we remind ourselves—the last of the terrible eight years of war and recession and neglectful business supervision (ENRON and Bernie Madoff and AIG being just three of the disasters for average Americans)…we are now in serious debt. We owe something like $11 trillion, and our current debt is piling up. Not because of bailouts or because of any stimulus, although those do contribute. The main problem is that so many people are out of work and that requires so much from our social safety net that our revenues have dropped like a stone.

Some people will say…and who knows if they are right…that this was a Neoconservative plot. Bush was President. Arch-conservative Dick Cheney, the instigator of the war on Iraq long, long before he was in office, and Hank Paulson, the former CEO of the richest investment company in the world, Goldman, Sachs…appointed by Bush…was Secretary of the Treasury.

Grover Norquist, founder of the anti-tax group, Americans For Tax Reform, a group advocating that basically rich people and corporations are above and beyond taxation because they do so much for the rest of us…occasionally creating jobs and occasionally investing in companies and occasionally giving to charity. Many people are familiar with his comment about government stating sarcastically that he doesn’t have a problem with government; he would merely like to “reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”

Americans in general get more back from their government than they put into it. They live in a by-and-large secure, stable society where there is opportunity and some compassion, expressed in social services sponsored by government and private services aided and encouraged by government. So why would anyone want to basically reduce government to roads and streets maintenance, and even then by private companies?

Because some people are accustomed to being treated well by government. The Koch Family, one of the richest private corporations in the world has a fortune based on oil drilling. Oil companies, until Jimmy Carter came along, used to get a tax break called the “oil depletion allowance.”

Here’s how it worked. You drill a well and let’s say it costs $250,000. You generate $1,000,000 in income from it. The oil depletion allowance would give you a tax credit of $275,000. (27.5%) So your cost of drilling that well was covered. But as the oil depleted in that well, the generous government continued to give you that $275,000 tax break every year for 9 more years! Or more if the well generated more income.

Oil men were used to getting tax breaks. There were many others. And so, when Ronald Reagan came into office, after Carter, it was about time that these wealth oilmen, as individuals could stop paying so much to get their taxes down to a reasonable level. So Reagan, in one single piece of legislation, cut their taxes from 74% to 28%. Simple. Put your guy in. Make sure he doesn’t care about all the people, just you and your friends.

That was the start of the awakening of the Right Wing. Suddenly they could tell the people that they were going to get a tax cut (which turned out to be less that $1,000 for the average chump) and they could get, literally, millions on millions of simply the differential between what they had been paying and what they would now pay.

Government revenues were basically cut in half and the structure of government, in which we took in less money by half than what we needed was set. It continued through all of Reagan, all of Bush up to Clinton. Clinton was able to cut government and raise taxes just enough to balance the budget and create a new paradigm that might have allowed us to continue with those several balanced budget years. But the national debt had already grown to over $5 trillion. George W. Bush and Dick Cheney came into office and once again cut about three trillion out of our tax base and then instigated a war that cost another $3 trillion. Then they orchestrated a financial collapse, or simply neglected the financial markets (they cut over 150 SEC investigators and purportedly had Chris Cox run any of the really serious investigators out of the Department). This resulted in the more than one-trillion-dollar cost of the collapse and the subsequent deficits which are now, because of the recovery and the 15 million people out of work, costing us about a trillion a year.

We are in deep doo-doo. We must try to recover this year and then put the country on a long-term austerity plan. No more stimulus. Just cuts in government services. If possible, we need to educate the American people to the fact that letting very rich people keep their own money is not a good idea. If you tax them heavily, they still may not pay those taxes.

If you tax them properly, they will be forced to invest those extra funds rather than pay taxes on them. And by extra we are talking about amounts of money over a million a year. Most Americans would say that they can afford to live on a million a year and would not mind investing a percentage…maybe half…of the next million into creating American jobs on which they would likely make more millions.

Next time: Part Two, a Long Term Strategy for Restoring the American Dream

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