After more than three years since the current economic crisis erupted in the late summer of 2007, there has been no lack of analyses as to its causes, origins, and even future direction. Most accounts by economists, media pundits, and policymakers alike grossly miss the mark. Some have been accurate in part. And a very small, select few have gotten most of it right.
But it is no longer sufficient to simply explain the crisis. The pressing need today is to explain what measures are necessary to bring about a sustained economic recovery. For programs and policies of the past three years, from Bush to Obama, and both Republican and Democratic alike, have fundamentally failed to generate recovery—except, of course, for the big banks, large corporations, and wealthy investors. Bank and corporate profits, stock prices, bond yields, and capital incomes in general have all largely recovered to pre-crisis levels and then some. Meanwhile the middle class, 100 million plus hourly wage earners, and the 90 million households earning annual incomes less than $90,000—Main Street USA—still languish in the economic swamp of continuing recession.
Those suffering the worst are the 25 million unemployed, the 10 million homeowners who have experienced foreclosures and bank seizures of their homes, the tens of millions of workers confronted today with declining real wages, with rising double-digit health-care premiums, millions of students’ overwhelmed with accelerating education costs, and shrinking pension balances for tens of millions. About to join their ranks are millions of public employees who will find themselves hammered on all fronts in 2011. And all 115 million households in 2011 will face accelerating costs for food, gasoline, and local government taxes and fees.
Fundamental Changes Underway
There is now more clearly than ever a two-tiered America—and it’s growing and spreading rapidly. From 1980 to 2007 the wealthiest 1 percent households (about 741,000 out of 115 million total households) witnessed their share of total income grow from only 8 percent to 24 percent by 2007, according to Internal Revenue data on income reported for tax purposes. What’s fundamentally changed after 2007 is that, in order to continue to ensure that the wealthiest 1 percent retain their 24 percent share of income, it is no longer sufficient merely to freeze income gains for the bottom 90 percent. Income is now being directly shifted from the bottom 90% to the top 10%.
Also, it should be pointed out that the widening income gap is a highly conservative estimate. The IRS data on which it is based does not account, for example, for income by the wealthiest households and corporations that is not reported to the IRS—i.e., income diverted offshore in order to avoid having it taxed.
Multinational corporations admit to nearly a trillion dollars that has been shifted to offshore subsidiaries by corporate accounting tricks in order to avoid paying U.S. corporate taxes. Were that trillion effectively taxed at the 35 percent corporate tax rate, it would produce a tax revenue windfall of about $350 billion. The remaining $650 billion, repatriated back to the U.S., would be reinvested in the U.S. instead of offshore creating additional profits of $100 billion a year. That could raise an additional government annual tax revenue of about $35 billion ever year from that $100 billion in each of the next four years.
Even greater in number terms is the amount that wealthy households, investors, and companies have diverted to offshore tax havens. In 1985, it was estimated by the investment bank Morgan Stanley that $250 billion was stashed away in offshore tax havens. In recent years the estimates range from $6 to $11 trillion. The share of that global total held by U.S. based investors, wealthy households, and corporations is at least 40 percent of that, or about $2.4 to $4.4 trillion. Much of that is held offshore by institutional investors, like hedge funds and other private banks, on behalf of wealthy individuals and other institutional investors they represent. So the wealthiest U.S. households probably have diverted $1-$2 trillion to these offshore havens as a means to avoid U.S. taxes. Assuming $1.5 trillion, and a 35 percent top marginal tax rate, that’s about $500 billion in new tax revenue immediately. Assuming annual profits from the remaining trillion dollars results in an additional $150 billion a year, tax revenue is about $50 billion a year annually after that.
Based on these two preceding tax changes alone, the total new tax revenue raised comes to around $850 billion in the first year and $85 billion a year thereafter for each of the next four years, or another $340 billion.
From his first stimulus program introduced in early 2009, it has been clear there never was any intent by the Obama administration for the government to directly create jobs. The strategy from the outset has been to bail out the banks and big non-bank corporations facing bankruptcy. It was argued at the time that if the banks were bailed out, they would then lend to businesses, which in turn would invest, hire and create jobs. But the banks have insisted—for nearly two years now—on hoarding their $1 trillion in cash.
Meanwhile, non-bank big corporations are hoarding another $2 trillion. Private sector business in 2010 hired only about 1 million of the 25 million effectively unemployed, and about two-thirds of that 1 million have been part-time and temporary workers.
Remarkably, despite the severity of the current recession, government at all levels has reduced jobs instead of hiring to offset job loss in the private sector. Going into 2011, the increasingly united political elite of both parties are in agreement that no more will be spent on jobs. The budget deficit comes first.
A third measure—a one-time, one-year, 10 percent surtax on the $3 trillion hoarded corporate cash—would produce an additional $300 billion in government tax revenue. A total of $1.150 trillion could be raised by these three measures in the first year alone.
A fourth tax measure could require the wealthiest households to pay the equivalent of the 12.4 percent payroll tax that the bottom 80 percent, or 92 million-plus middle and working class households, pay on their annual income. If the wealthiest 1 percent households were required to pay the 12.4 percent on their total income (dividends, capital gains, interest, rent, etc.), just as the bottom 80 percent/92 million do, the payroll tax would produce tax revenues of an additional $85 billion in the first and every subsequent year. This 12.4 percent could be levied as a line item adjustment after taxes paid on their annual 1040 tax returns.
The next wealthiest 19 percent households, about 22 million, earn both capital incomes, like the wealthiest 1 percent, and wages, like the bottom 80 percent. But they pay the 12.4 percent payroll tax only up to $106,800 a year and pay nothing at all on their capital incomes. If they, too, were to pay the 12.4 percent payroll tax equivalent on all their salary in excess of the $106,800 ceiling for the payroll tax, as well as on all their non-salary capital incomes, it would raise roughly an additional $85 billion a year. The total is now roughly $1.320 trillion in the first year, and $255 billion each year thereafter.
That $1.320 trillion, by the way, could just about cover the U.S. federal government’s currently projected budget deficit of $1.3 trillion. If the entire amount were dedicated to reducing the deficit, it would, in turn, eliminate any need to reduce social security benefits, cut Medicare and Medicaid, reduce student loans, and other social program cuts forthcoming in the next U.S. budget.
A fifth and final tax proposal is to impose a permanent transactions tax on all financial trades —stocks, bonds (per $100 value), and the trillions of derivatives trades over the counter (interest rate swaps, currency swaps, etc.). A simple $1 fee for every stock trade would have virtually no negative effect on stock trading. Similarly a 10 cents for $100 value bond trade would amount to a mere $10 tax on the purchase of a $10,000 U.S. Treasury bond, for example; an amount that would hardly deter the bond sale. Additionally, with the passage of the Dodd-Frank financial regulation bill in June 2010, for the first time some derivatives trades will have to occur in clearing house transactions, which means they will now be recorded. A financial transactions tax on derivatives trading of similar dollar proportions as for stocks and bonds would raise further significant amounts of tax revenue. An additional $150 billion a year in tax revenue would be raised from a financial transactions tax.
The total new revenue raised from the preceding five tax measures equals $1.470 trillion in the first year and $405 billion a year from the second through fifth years.
Government Job Creation
The overwhelming fact today is that business won’t create jobs; therefore government must. That means a direct shift in government policy from relying on markets to create jobs by flooding corporations with cash via bailouts, zero interest rate loans to banks, and multiple business tax cuts, to a government policy of direct job creation itself.
An effective program would target immediate, intermediate, and long-term job creation. For example, service sector jobs can be created more quickly, whereas jobs on large infrastructure projects take much longer to ramp up. The same applies to alternative energy projects.
A third of the available first year funding, about $500 billion, should go toward establishing a Government Alternative Energy Public Investment Corporation (AEPIC) to produce solar, wind, and other infrastructure to jump start this new industry. The current approach of the Obama administration is to provide government loans to private sector company start ups. However, it is clear these companies are increasingly unable to compete with Chinese and other European companies and are in decline financially. Only a large-scale U.S. government project can compete with other heavily government-dependent, subsidized, and virtually government-run companies in this sector in Asia and Europe.
Another $250 billion would fund traditional infrastructure jobs, emphasizing infrastructure repair projects in the U.S. Labor intensive projects should also be given strong preference, as opposed to big ticket cost projects that hire few initially and where most of funding is spent on expensive equipment and materials. Just as in the 1930s, the Civilian Conservation Corps was created immediately and 500,000 workers (equal to 2 million in today’s larger labor force) were hired in a matter of months to clean up forests and build rural structures, today a similar organization—a Civilian Reconstruction Corp (CRC)—would focus on repair of roads, public lands, and inner city structures owned by government, community facilities, local health clinics, and the like. Job creation need not be exclusively by government corporations, but shared with private sector employers and even totally contracted out if immediate hiring were the rule.
For quick job creation some of the funding might be dedicated to the establishment of local health clinics, as part of a third program, a Community Health Services Corp (CHSC). The CRC could build them or, better yet, convert other buildings and structures in the inner cities and elsewhere. These health clinics would be staffed by doctors, nurses, technicians and other administrative employees. Their availability would offload the growing burden on hospital emergency rooms and provide immediate healthcare for the current 50 million uninsured and the tens of millions on Medicaid, thereby also offloading some of the costs of Medicaid on States’ budgets. Salaries could be paid by a combination of direct payment from the $200 billion allocated for this program and generous tax deductions for pro bono work by professionals. Part of the funding would also go towards a mass training program to bring 100,000 new health-care professionals and related staff into this sector. Government-subsidized training costs would be worked off by guaranteed years of service in the facilities: $50 billion annually would fund employee hiring and equipment for the community clinics.
Complimenting the above three targeted job creation programs is a new equivalent to the WPA jobs program of the 1930s, a 21st Century Works Project Administration (21WPA). Initially funded by $250 billion, it would create jobs in sectors and industries other than those created by the preceding Public Investment Corp, CRC, and CHSC. This program would function along lines similar to its 1930s counterpart, which created more than 8 million jobs during its 6-year tenure—which in today’s workforce would be the equivalent of 30 million jobs. Not as initially ambitious as its 1930s counterpart, the New WPA would not at first function on a nationwide scale, but target employment creation in states and areas within states with chronically high joblessness. Like the WPA it would create decent paying jobs, not minimum wage jobs, but no jobs paying more on average than $50,000 a year. Employment terms would not exceed more than two consecutive years for anyone hired.
There are more than nine million involuntary part-time employees. Their underemployment status is the equivalent of 4.5 million unemployed of the total 25 million effective unemployed today in the U.S. Part of the jobs creation strategy should be to move these workers to full-time employment status, by a series of measures that would temporarily subsidize their benefits in exchange for employers agreeing to convert them to full-time status and pay. To strengthen these measures, wage legislation should be amended to require companies to provide full benefits to part-time and temporary employees, to index their wages to levels of wages in the full-time workforce in the company employed, and for employees to provide all other benefits provided to full-time employees. These provisions would apply to public employment, including schools, as well as private sector employment. Another $50 billion would fund this program in its first year, enabling the conversion of two million current involuntary part time jobs to full time.
All of the $170 billion a year raised by the 12.4% payroll tax now levied on all incomes would be earmarked for encouraging workers having to work past retirement to leave the workforce, thereby making more jobs available to younger workers. Workers in the 60-69 age bracket are the fastest growing segment of the labor force today. This is largely due to inadequate retirement benefits, forcing the working elderly to continue past normal retirement age in the labor force. Social security benefits should be further subsidized by the payroll tax measures noted above ($170 billion a year), to allow earlier retirement at two-thirds equivalent pay for those in this age group, instead of the current less than half benefits rate. Retirement should be mandatory at the current eligibility age 66 if they receive subsidized payments at the two-thirds level; and voluntary at age 66 if they choose not to receive the two-thirds.
The remaining $50 billion of the total $1.470 trillion funding would be deployed to provide direct incentives to corporations to repatriate jobs offshore back to the U.S., particularly in the manufacturing sector of the economy. The incentives should be accompanied by strict disincentives for continued offshoring of jobs. The disincentives would include the loss of current tax credits that encourage offshoring, as well as the imposition of 25 percent tariffs on U.S. corporations that have offshored jobs and then re-import the products once made in the U.S., now produced offshore, back to the U.S.
An immediate, positive spillover effect from these measures and taxation would no doubt include an incentive to private employers to quickly start hiring themselves. They would know that hiring resistance in their companies and industries might well make them a future target for a government direct hiring project.
The direct job creation program would launch a very large, front loaded, job creation effort on multiple fronts, given the initial major tax revenue windfalls from repatriation and other measures. It would thereafter be funded from the ongoing roughly $400 billion a year revenue sources, as well as direct sales revenues generated from public investment projects.
The following Table 1 summarizes the five elements of tax restructuring that would raise $1.470 trillion in new tax revenues in the first year and another $1.620 trillion over the next four years. The above seven jobs creation programs funded by these new revenues would create 14.7 million jobs in the first year to jump start today’s stagnating economy, and fund a continuing 4-6 million jobs in each of the next four years as well.
Financing for Creation of 14.7 Million Jobs
Financing Source New Tax Revenues Raised Jobs Created
(1st Year) (2nd to 5th Year)
U.S. Multinational Corps $350 bil. $140 bil. 3.5 million
Offshore Profits Tax
Avoidance & Repatriation
Wealthy Investors Tax $500 bil. $200 bil. 5.0 million
10% Corporate Surtax $300 bil. None 3.0 million
on $3 Trillion Cash
12,4% Payroll Tax On $170 bil. $680 bil. 1.7 million
Financial Transactions $150 bil. $150 bil. 1.5 million
Tax on Stocks, Bonds,
and OTC Derivatives
TOTAL $1.470 trillion $1,620 trillion 14.7 million
How many ($50,000 per year average) jobs could be created by the seven specific programs, assuming ($845 billion) of the $1.470 trillion is dedicated to direct job costs (the remaining for other programs costs), is summarized in Table 2 that follows:
Program Specific Job Creation
PROGRAM JOB SPECIFIC FINANCING JOBS CREATED (1)
1. Alternative Energy $250 billion 5 million
Public Investment Corp + additional revenues
2. Civilian Reconstruction $125 billion 2.5 million
3. Community Health $100 billion 2 million
Services Corp (CHSC) + additional revenues
4. 21st Century Works $100 billion 2 million
5. Involuntary Part Time $50 billion 1 million
Employee Wage Subsidy
6. Social Security Benefits $170 billion 1.2 million
at 2/3s level in exchange
for full retirement
7. Manufacturing Jobs $50 billion 1 million
Repatriation to U.S. Wage
The preceding are but some possible examples of how a direct employment government program might look and function. The U.S. economy is not a purely industrial economy any longer. Job creation under such a program must therefore be quality jobs, which does not necessarily mean the highest paying jobs. The average cost of $40,000 in direct wage and $10,000 in benefits per worker is reasonable and approximates the median pay. Moreover, the principle of direct job creation does not preclude the government providing funds in part to private sector employers, providing jobs are created first, within the pay parameters outlined, and according to the minimum requirements of the programs. A strategy mixing immediate job creation with intermediate and longer term jobs is also necessary. Other mixes of public-private are also possible. The key determinant is how fast can reasonably decent and productive jobs be created. The program must have a massive initial impact effect, and a reasonable continuing effect.
(1)Assumes all jobs created first year. Given the more likely assumption that jobs are created over a longer period, then fewer jobs are created first year and additional jobs are created in the second and subsequent years, funded by the remainder of the $1.47 trillion not used the first year and the additional $1.62 trillion and further revenue sales after the first year. Employment in programs 2 and 4 will not exceed more than two years duration per worker. The subsidy for program 5 lasts for only one year, until legislation is passed limiting the number of involuntary part time employees that may be hired per company. Program 7’s subsidy duration is also only for one year. Program 1 and 3 are assumed progressively to self fund over time. Programs 1, 3, and 6 will continue as permanent.
It is becoming increasingly clear that Corporate America is now comfortable with a much higher level of unemployment. What was considered normal unemployment rates in the past, around 4.5 percent, are now argued by corporate America as in the past. The ‘new normal’ is 8-9 percent, or about twice that in the past, they are telling us. This must be rejected. And if corporations flush with trillions in cash, refuse to hire sufficiently to reduce unemployment to 4.5 percent—then the government must become the direct employer of choice even if that means competing with the private sector directly as an employer. The choice is either the government engage in direct job creation, or accept today’s nine percent plus level of joblessness for decades to come.