Economist Robert Reich has a way of cutting through the noise.  He points out that the self important noises from the media and Washington DC about the federal budget deficit and so-called “fiscal cliff” actually disguise a fundamental underlying issue: the wealthiest individuals and corporate interests want to benefit from government on everybody else’s tax dollars.

The Grand Diversion

Surely, it couldn’t be that simple, could it? After all, economics is a very complicated subject far beyond the ken of the ordinary citizen?

Well, that’s the lawyer’s gambit – the Grand Diversion – the key to job security for those connected bluebloods who find themselves at the peak of the the legal and political professions. It goes like this:

  1. Complicate a simple matter so much that it takes a lawyer to unpack it.
  2. Report the story in a simplistic, deceptive, divisive way that glosses past the underlying issues and divides the public along ideological lines, and stimulates a false debate.
  3. Initiate an activist judicial/legislative agenda that provides the economic benefits to lawyers, legislators and CEOs.

It may take a tough man to make a tender chicken, but it also takes a clearheaded economist to explain a simple matter in simple terms. Professor Reich puts it this way:

The non-partisan Congressional Budget Office on Thursday warned that the automatic tax increases and spending cuts scheduled to start in January amount to too much deficit reduction, too soon. They’d put the economy back into recession, and push unemployment to about 9 percent. But the CBO also warned of an economic crisis ahead if the United States doesn’t stem the growth of the nation’s exploding deficit.

Get it? Reduce the budget deficit too quickly, and we’re in trouble. But fail to address the deficit, and we’re also in trouble. It’s really a matter of timing. That’s why I think any deal should include a trigger mechanism that begins to cut spending and raise taxes when the economy has two consecutive quarters of 6 percent unemployment or less, and 3 percent annualized growth or more.

In reality, though, the upcoming game of chicken isn’t about any of this. It’s over the clearest issue President Obama and Mitt Romney fought over: whether taxes should be raised on the rich.

The Back Story

Here’s the Republican game:

  • Republicans created an enormous budget deficit through giveaways to the wealthy (the Bush tax cuts), to the defense and energy industries (two unfunded wars), Wall Street (deregulation of derivatives) and by privitizing Medicare (GWB’s unfunded Medicare Advantage initiative.)
  • This led to the Great Recession that required subsequent bailouts, leaving an incoming Democratic president holding the bag.
  • Now the whole mess is thrown back in the face of a Democratic president as a bludgeon to balance the budget by cutting government programs that benefit the 99% who need them, in order to continue to dish it out to the 1% who don’t.

Here’s the Democratic game:

  • Democrats tentatively suggest a balanced approach, one that asks for shared sacrifice, meekly asking the robber barons to pay their fair share of taxes (which they haven’t for years.)
  • They ask for a “Grand Bargain.”
  • A compromise is reached that continues the redistribution of middle income tax dollars and national wealth upward, further hollowing out the middle class, expanding poverty and exacerbating income disparity, albeit at a slightly slowed pace.

Call it a “Grand Bargain” compromise, but the only ones who are really compromised arethe 99% who are not economically privileged by a fortunate birth. And the reason this kind of sacrifice is required is not because it is the only possible solution, but because it is the only solution acceptable to the influential interests.

The citizens are given the message that times are hard, as a result of having been too generous toward them, and that they now need to make sacrifices to protect the “job creators.” The economics and math don’t add up at all, but the Grand Diversion has the weight of authority and ideology, so no one is the wiser.

Eliminating the Deficit Isn’t Really Rocket Science

Professor Reich also demonstrates exactly how easy it really is to eliminate the deficit without disrupting the economy. It’s abundantly simple, and all it takes is basic math skills and common sense – two things we seldom see out of Washington. The equation goes like this: Instead of taking it out of the hides of the wealth creators (the working class) the privileged few who benefit from corporate welfare and tax advantages for the ultra wealthy can now pay their fair share. Reich does the math:

Assuming the goal is $4 trillion of deficit reduction over the next decade (that’s the consensus of the Simpson-Bowles commission, the Congressional Budget Office, and most independent analysts), here’s what the President should propose:

First, raise taxes on the rich — and by more than the highest marginal rate under Bill Clinton or even a 30 percent (so-called Buffett Rule) minimum rate on millionaires. Remember: America’s top earners are now wealthier than they’ve ever been, and they’re taking home a larger share of total income and wealth than top earners have received in over 80 years. Why not go back sixty years when Americans earning over $1 million in today’s dollars paid 55.2 percent of it in income taxes, after taking all deductions and credits? If they were taxed at that rate now, they’d pay at least $80 billion more annually — which would reduce the budget deficit by about $1 trillion over the next decade. That’s a quarter of the $4 trillion in deficit reduction right there.

A 2% surtax on the wealth of the richest one-half of 1 percent would bring in another $750 billion over the decade. A one-half of 1 percent tax on financial transactions would bring in an additional $250 billion. Add this up and we get $2 trillion over ten years — half of the deficit-reduction goal.

Raise the capital gains rate to match the rate on ordinary income and cap the mortgage interest deduction at $12,000 a year, and that’s another $1 trillion over ten years. So now we’re up to $3 trillion in additional revenue.

Eliminate special tax preferences for oil and gas, price supports for big agriculture, tax breaks and research subsidies for Big Pharma, unnecessary weapons systems for military contractors, and indirect subsidies to the biggest banks on Wall Street, and we’re nearly there. End the Bush tax cuts on incomes between $250,000 and $1 million, and — bingo — we made it: $4 trillion over 10 years.

And we haven’t had to raise taxes on America’s beleaguered middle class, cut Social Security or Medicare and Medicaid, reduce spending on education or infrastructure, or cut programs for the poor.

Conclusion

The deficit isn’t really that difficult to fix, is it? It’s just that Americans can’t do math, so we’re none the wiser when politicians fool us about the math and the logic. The “fiscal cliff” is not a cliff at all. It’s a manufactured controversy that aims to raise taxes and cut benefits for the working class to feed the insatiable appetites of the rich and powerful. You probably knew that already. But sometimes it takes a brilliant economist to simplify the matter enough to  penetrate the smokescreen.

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