David Brooks is Wrong: America Can Afford What Needs to be Done

The rightward New York Times columnist David Brooks warned in his column yesterday that a new Democratic president would be engulfed in the same "Reich versus Rubin" choice that faced Bill Clinton in 1993 -- either fulfill your campaign promises and add to the federal budget deficit or forget your promises and satisfy Wall Street (Brooks didn't put it exactly this way, but that's what he was getting at).

What Brooks neglects to mention is that the REASON a new Democratic president might face such a choice is that he or she will be burdened by much the same spend-thrift legacy that Bill Clinton discovered when he arrived in the Oval Office in 1993. Then, it was deficits of $300 billion as far as the eye could see. In January of 2009it will be deficits of $400 billion as far as they eye can see. The fiscal-political strategy of Ronald Reagan and George H.W. Bush, in other words, was the same as that of George W. Bush -- "starve the beast" through irresponsible supply-side tax cuts and military buildups that make it almost impossible for any subsequent Democratic president to deal with the nation's needs.

This doesn't mean that a new Democratic president would have to break the bank, however. Where to get the additional money needed for universal health care, better schools, and crumbling infrastructure? Three sources: (1) The peace dividend from ending the Iraq War, (2) a more progressive tax, and (3) modest deficit spending to cover public investments that generate economic growth.

1. According to government figures, the wars in Iraq and Afghanistan have so far cost the United States more than half a trillion dollars. Another four years would cost significantly more, because this figure doesn't include the ever larger costs of recruitment, the cost of replacing the equipment that's been used in the war so far, or the ballooning costs of taking care of America's permanently wounded and disabled. If a Democratic president pulls out of Iraq -- even if some troops need to be deployed to Afghanistan -- it's a safe estimated that the peace dividend would be more than $100 billion a year, even including the costs of attending to our wounded.

2. Rolling back the Bush tax cuts for the wealthy will yield some $200 billion more. But the new president should not stop there because the only people who have the money necessary to reverse the nation's troubling trends are at the top. Recent data from the IRS show that the wealthiest 1 percent of Americans are earning more than 21percent of all income -- a postwar record -- while the bottom 50 percent of Americans combined are earning just 12.8 percent of total income.

Even as income and wealth have become more concentrated than at any time in the past 80 years, those at the top are now taxed at lower rates than rich Americans have been taxed since before the start of World War II. Taxpayers who bring home over $5 million annually now pay less than 22 percent of their incomes in federal tax, on average. Managers of hedge funds, private-equity partners, and many venture capitalists are paying no more than 15 percent -- since their earnings are, absurdly, treated as capital gains. This means that America's wealthiest, who have been receiving most of the economy's bounty, are paying a smaller percentage of their income in taxes than are middle-class Americans. Financiers who are raking in hundreds of millions -- last year, each of the 25 highest paid hedge-fund managers took in an average of $560 million -- are paying at a lower rate than many of America's working poor who barely clear $20,000 annually.

Only a relatively few at the top would need to pay more. According to the Institute on Taxation and Economic Policy, if the marginal income tax rate on Americans whose yearly income exceeds $10 million were raised to 70 percent, and the rate for those who earn between $5 million and $10 million a year were raised to 50 percent, federal revenues in 2008 would increase by $105 billion. By my calculation, a tiny annual wealth tax of one-tenth of 1 percent on all net worth exceeding $5 million -- a tax that would affect only 50,000 households, or fewer than one-tenth of 1 percent of the nation's taxpayers -- would yield an additional $100 billion.

Remember that a progressive income tax has been a cornerstone of our fiscal system since 1913 -- and our current non-progressive and often regressive tax is the anomaly. In World War II, rich Americans paid a marginal rate of over 68 percent of their incomes in federal taxes, even after exploiting every tax loophole they could find. In the 1950s, under Dwight Eisenhower, the highest marginal rate was over 90 percent, and even after using all the deductions and credits, the rich paid almost 52percent.

3. Finally, the next president will need to wean the public off the false notion that fiscal austerity is necessarily good for the economy. There's a crucial difference between public spending that builds the future productivity of the nation's workforce -- spending on education and infrastructure, for example -- and spending that improves today's living standards. Borrowing in order to accomplish the former is wise because it enhances the capacity of the nation to produce goods and services, and thereby shrinks both the deficit and debt as percentages of the total economy. By analogy, while it makes no sense for a family already in debt to borrow more money to finance a cruise, it makes eminent sense for it to borrow more in order to send a child to college.

This obvious point should be illustrated in the annual budget. Such "investments" should be segregrated from ordinary spending. Annual spending should not exceed annual revenues, but investments should be judged by their potential for growing the overall economy. If the returns to the economy in terms of economic grow are greater than the costs of such borrowing, these public investments are appropriate.