How So-called Experts Mislead Us about



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TABLE 1.

MEDIAN FAMILY INCOME

BEFORE AND AFTER ADJUSTMENT
Median annual family income

*Nominal *Real (1996) **After

Year dollars dollars adjustment
1970 $ 9,867 $37,485 $97,677

1980 21,023 40,079 91,914

1985 27,735 40,443 90,007

1990 35,353 42,440 89,282

1996 42,300 42,300 88,653
*From Table No. 746, 1998 U.S. Statistical Abstract

**Author’s calculation as described in text
Adjustment No. 2: Multiply median weekly wages and salaries by the percentage of the labor force employed (that percentage equals one minus the unemployment rate). The result tends toward what the median wage would be if zero incomes of the unemployed were included. Using this measure avoids the problem of changing family size. Using constant (inflation-adjusted) “real” dollars, the figures in Table 2 show that workers

made no gains in weekly earnings over that 25-year period, with or without the adjustment. In 1980 and 1985 when unemployment was about 7% instead of about 5% in the other years, real earnings appeared higher than in 1970, but those gains did not hold up after adjusting for the percentage employed.


TABLE 2.

WAGES AND SALARIES OF FULL-TIME WORKERS
Median weekly earnings

*Nominal *Real (1995) **After empl.

Year dollars dollars adjustment
1970 $130 $480 $456

1980 $261 $483 $449

1985 $343 $486 $451

1990 $412 $480 $454

1995 $479 $479 $452

1997 $503 $465 $440


*From Table No. 696, 1998 U.S. Statistical

Abstract (and earlier editions)

**Author’s calculation as described in text
It would be helpful if median earnings were available on an hourly rather than weekly basis, because news reports reveal that many people are working longer hours to maintain their earnings. Instead of median figures, the government reports average hourly earnings for production or nonsupervisory workers on private nonfarm payrolls. Within this group, unlike a population that includes great extremes of income, the average (mean) is probably close to the median. According to the U.S. Bureau of Labor Statistics, average hourly earnings in constant (1982) dollars, fell from $7.78 in 1980, to $7.77 in 1985, $7.52 in 1990, and $7.39 in 1995, partially recovering to $7.55 in 1997.12 This gives some indication of overall trends, although supervisory and salaried workers are, of course, excluded, and may be working longer hours for weekly pay that is not increasing.

These results make it rather clear why so many people feel they are working harder for less than a generation ago.


4. FALSE BOOM OF THE EIGHTIES
Politicians have a natural inclination to take credit when things go well, knowing they’ll be blamed whenever things go wrong. Whether its Democrats gloating over rosy economic figures under President Clinton or Republicans claiming a period of unprecedented growth and prosperity under President Reagan, neither party faces the realities behind the statistics, such as the decline in good-paying permanent jobs with fringe benefits since the mid-1970s.

Those who point with pride to prosperity in the Reagan administration like to forget about the decline of his first two years and trace changes from 1982 to 1988, his final year. After the severe recession of 1982-83 his remaining years represented a recovery.

Making the comparison more appropriately from President Carter’s last year to President Reagan's final year, however, the inflation-adjusted median family income grew 6.7% in eight years from $25,504 in 1980 to $27,211 in 1988, and for the twelve years of Reagan and Bush the gain was 2.2% from $25,504 in 1980 to $26,068 in 1992.13 Since these figures are before taxes, they fail to show the after-tax effect on middle-income families, who paid more in taxes during this period, as will be discussed in a later chapter.
TABLE 3

BOX SCORE ON THE PROSPERITY OF THE 1980s

(Shown in constant (1982 84) dollars)
Real median14 Real median15 Federal16

family wkly.wages & debt as

Year income salaries % of GDP
1970 $25,401 $335 37.8

1980 $25,504 $317 33.4

1981 $24,607 $311 32.6

1982 $24,268 $313 35.4

1983 $24,679 $314 40.1

1984 $25,441 $314 41.0

1985 $25,776 $319 44.3

1986 $26,878 $327 48.5

1987 $27,262 $328 50.9

1988 $27,211 $325 52.5

1990 $27,049 $315 56.4

1992 $26,068 $317 65.1


See tables in previous chapter for figures adjusted

by the author for changes in employment levels.
When President Reagan asked for economic legislation in February 1981, a month after his inauguration, he promised a balanced budget after three years and then a surplus.17 By August 1981 a bipartisan coalition in Congress gave him just about all he asked for in a complex financial package. This included cuts in personal income tax, where the top bracket rate was reduced from 70% to 50% immediately, lesser brackets dropped 5% in October 1981, 10% in July 1982, and another 10% a year later, special benefits for the oil industry were added, and the tax burden on corporations was far lighter in 1982 than it had been in 1980.

Those who received the most benefit from tax cuts could have used their extra resources to create new jobs, but the

incentive to increase production depended on the general public having sufficient purchasing power to buy the resulting goods and services. Instead, many of those who saved on taxes preferred to wheel and deal in corporate acquisitions, leveraged buyouts, junk bonds, ripping off savings & loans and pension funds, and exporting jobs by moving their manufacturing operations to low-wage countries.

Spending cuts were all in the non-military areas. The Defense Department and its contractors were given a blank check (over the objections of Budget Director David Stockman), and a decade of record deficits began. Stockman later admitted using devices like a “magic asterisk” for tens of billions in unspecified future cuts to project deficit reductions “by hook or by crook, mostly the latter.”18 Tight money policy, imposed through the Federal Reserve, kept interest rates high, and would have hurt the economy even more if it had not been offset by deficit spending on the military that amounted to an unacknowledged expansionary fiscal policy.

These economic policies were supposed to overcome inflation and “get America working, saving, and investing again.” Instead, there was greater unemployment, savings declined, and investment in research and development dropped sharply in the 1980s. Inflation was reduced partly because the OPEC crisis wound down and partly because of the severe recession.19

The claim that Reaganomics brought about prosperity doesn’t stand up to the facts. Median income families did not share in the speculative profits of the corporate CEOs, junk bond promoters, and other wheeler-dealers. Junk bonds, so called because of their high risk, were bought by pension funds and savings and loans, leading to some of the biggest financial scandals of the 1980s. Although some supporters claim junk bonds were used to finance growth industries, they have mostly served to finance corporate raids or buy-outs that left the surviving company saddled with enormous debt. How this works is well described in the book (and movie), Barbarians at the Gate, about Ross Johnson and RJR-Nabisco, revealing how insiders, speculators, securities firms, banks, and Wall Street lawyers profited in the many millions of dollars.

Trickle-down supply-side economics had not worked in the 1920s when Calvin Coolidge and the Republican Congress slashed the tax rates for the upper brackets, leading to the 1929 stock market crash and the Great Depression of the 1930s. Nor did it work when the experiment was repeated in 1981. Between June 1981 and January 1983, 4.2 million jobs were lost.20Unemployment grew from 7% in 1980 to nearly 10% in 1982 and 1983, and the median weekly wage did not recover until 1985 to the 1980 level.

As an indication of how Reaganomics affected different income levels, the money income for the lowest fifth dropped from 5.2% in 1980 to 4.2% in 1993, while the highest fifth increased its percentage from 41.5% to 46.2%, and the top 5% upped its share from 15.3% to 19.1%.

A National Science Foundation study of the amount American companies spent on research and development in the 1980s revealed that R&D expenditures had increased by 5.5% in the first half of the decade but were more than cut in half in the closing years.21 National production as measured by real GDP grew only 29.7% from 1980 to 1990, compared with 45.8% from 1960 to 1970 and 31.4% from 1970 to 1980 despite OPEC and other crises of the 1970s.22

One of the objectives of Reaganomics was said to be increasing the rate of savings by Americans. Even this failed, as savings averaged just 5.4% of disposable income during the 1980s, down from about 7% to 8% in most years of the 1950s, 60s, and 70s.23 Treasury Secretary Regan’s 1981 prediction that the tax cuts would increase personal saving failed dismally. In 1986 Americans saved only 3.8% of their disposable income in contrast to 7.1% in 1980. Government registered negative savings as the forecast of a balanced federal budget by fiscal 1984 failed to be fulfilled. The federal deficit rose from 2.5% of GNP in fiscal 1980 to 5.5% of GNP in fiscal 1986.

From 1980 to 1986, national saving, including both the private sector and the government, declined from 16.2% of GNP to only 12.8%, and net lending to foreigners of $13 billion was reversed to a $144 billion net borrowing from foreigners. America became an international debtor sometime in 1985 and

quickly supplanted Brazil as the most heavily indebted nation in the world. 24

Nobel Prize economist James Tobin of Yale said of supply-side economics: “What it is sure to do is redistribute wealth, power, and opportunity to the wealthy and powerful and their heirs.”25 Even Reagan’s Budget Director David Stockman, who had persuaded Congressional leaders in both parties he was the one man who understood the federal budget, finally revealed that supply-side doctrine “was always a Trojan Horse.” Stockman himself explained, “It’s kind of hard to sell ‘trickle down,’ so the supply side formula was the only way to get a tax policy that was really ‘trickle down’ theory.”

As William Greider, to whom he made his confession, put it, Stockman “was conceding what the liberal Keynesian critics had argued from the outset—that supply-side theory was...only new language to conceal a hoary old Republican doctrine: give the tax cuts to the top brackets...and let the good effects ‘trickle down’ through the economy to reach everyone else.”26 Blinder (1987) described the failure of these policies: “Supply-side predictions that savings, investment, labor supply, productivity, and GNP would all grow rapidly while the budget deficit fell were proven wrong.”27

Economist Lester Thurow of MIT wrote in 1992: “I suspect that future historians will also say that America had an oligarchy in the 1980s. The merger wars, junk bonds, business magazines whose biggest-selling issues were lists of the wealthiest Americans, the life-styles of the rich and famous on TV, trade and budget deficits that remain uncured, financial scandals, tax cuts for the wealthy—all are manifestations of an oligarchy....If an oligarchy is redesigning a tax system, it will rig the system so that it pays the least possible taxes. The recommended tax laws will be defended as good for the country, but the prime goal will be tax cuts for the oligarchs themselves. When a public diet is required, the public services that go to the oligarchs will be the last to be cut.”28

He noted that the laissez-faire policies of Reagan and of British Prime Minister Margaret Thatcher, both inspired by the monetarist neo-classical economic theories of Milton Friedman,

had failed: “In the U.K. unemployment is higher than it was when Mrs. Thatcher came into office (7.3% versus 5.8%), and the U.K. continues its slow drift down the list of the world’s richest countries.”

The policies that had been proclaimed as “new” were actually a rehash of the 1920s. Wall Street was as euphoric as it had been under President Coolidge. Journalist Haynes Johnson described it this way: “Rather than promote savings to spur future investment and growth, the evidence was that much of the tax cut revenues of the twenties went directly into the stock market in hopes that individuals would further be able to cash in on the boom. The same phenomenon was at work in the eighties. People were not saving; they were accumulating debt, plunging deeper into the markets, seeking ever-greater personal gains. At the same time, real capital spending, which induced genuine economic growth, was declining. In the end the merger craze and piles of new debt it induced did not improve the nation’s industrial capacity and competence. It did not result in overall economic benefit to the nation.”


The secret financial crisis

Economist John Kenneth Galbraith predicted in the January 1987 Atlantic that eventually the wave of mergers and corporate debt they created would be “regarded as no less insane than the utility and railroad pyramiding and the investment-trust explosion of the 1920s.”29

That following October the bubble burst as record losses were recorded on the stock exchanges of Tokyo, Rome, Frankfurt, Amsterdam, Paris, London, and New York. On Wall Street, stock market prices had dropped 22.6%, almost double the record losses in the crash of 1929. Most people never realized the extent of the disaster that hung over the New York Stock Exchange and the world’s financial system.

Haynes Johnson noted the irony that “what kept ’87 from turning into another ’29 was the very hand of the federal government that Reagan and the supply-siders had railed against.” As the stock exchanges were on the brink of closing down, the

Federal Reserve announced a reversal of its tight money policy and provided funds that enabled banks to extend credit to troubled Wall Street firms. 30
5. DEFICITS AND DEBT
It would be reasonable to think that the national debt is simply the accumulation of past deficits, but because of government accounting peculiarities it is not true. On February 3, 1998, newspapers printed a photograph distributed by the Associated Press of President Clinton and Vice President Gore flanking a big placard: “1999 Federal Budget Deficit $0! A Balanced Budget.” That implied the national debt would stop rising, didn’t it?

Not necessarily. I added up the federal deficits for 16 years from fiscal years 1981 through 1996 for total deficits of $3.030 trillion; then I subtracted 1996 national debt from that of 1980 for the 16-year increase in debt and got $4.315 trillion. Therefore, total deficits were $1.285 trillion less than the increase in debt, as reported in the official government statistics. What’s wrong here?

The general answer is that this is one of many ways government accounting dishonestly attempts to confuse the taxpayer. More specifically, politicians play games with what is “on-budget” or “off-budget.” For example, a bi-partisan tacit agreement kept the public in the dark about the extent of the savings and loan crisis until after the 1988 election and later arranged for the bailout to be off-budget. Costs that never showed up as expenditures in the budget were added to the national debt. Conversely, Social Security tax receipt surpluses reduced budget deficits but added to the debt when government bonds were issued for the trust funds.
The mania for budget balancing

Despite the unreliability of budget measures, a campaign promise is frequently made and broken to balance the federal budget, despite the fact that the public doesn’t even know the true size of the deficit. The available figures do not make sense, because government accounting has its own rules. They are so different from generally accepted accounting principles that whenever CPAs do an independent audit of a governmental agency they use special wording much different from a standard opinion.

Capital investment and current expenses are mixed together in government accounting. Also trust funds are mixed in with current operations. No business could operate with such accounting, and it leaves taxpayers without honest information about their government.

Nevertheless, the idea that the government cannot keep borrowing without the same kind of disaster that faces a family living beyond its means is one that sounds like common sense.

In his inaugural address President Reagan declared: “For decades we have piled deficit upon deficit, mortgaging our future and our children’s future for the temporary convenience of the present....We must act today in order to preserve tomorrow.”31 Even Franklin D. Roosevelt was elected president on a platform that promised to cut spending and balance the budget. Both Roosevelt and Reagan added considerably to the national debt, whether for good or ill. Presidents Nixon and Carter each reduced deficits but left office rather unhappily.

In a December 1995 column William Safire blamed the “deficit explosion” from $73.8 billion under Carter in 1980 to $290 billion in 1992 under Bush on “House Democrats” whose “spending binge” was “insufficiently resisted by Ronald Reagan,” omitting that the president’s own proposed budgets were not balanced. On at least one occasion, to force Congress to increase military spending, he refused to sign the appropriations bill and let the treasury run dry. In 1980 the federal budget spent 22.6% on

national defense and 27.8% on what OMB calls “human resources” (excluding Social Security and Medicare). By 1987 the balance had approximately reversed to 27.6% on national defense and 21.6% on human resources.32

Alan S. Blinder’s 1987 book, Hard Heads, Soft Hearts, pointed out that spending other than interest took 20.4% of GNP in 1981 and 20.7% in 1985, making little change in spending relative to GNP, simply shifting it away from civilian purposes toward the military. Total spending authorized by Congress in each year was extremely close to the president’s original budget submissions. [See Wall Street Journal, Jan. 6, 1987.] “Thus the Reaganite charge that spendthrifts on Capitol Hill caused the budget deficit simply won’t wash.”33

The Gramm-Rudman-Hollings Act in 1985 was supposed to eliminate the deficit on a rigid five-year timetable, but a district court declared the law unconstitutional in February 1986. Before the case reached the Supreme Court each house of Congress passed a budget resolution purportedly achieving the $144 billion deficit ceiling, but President Reagan would accept neither budget, for each raised taxes and cut his request for defense. After the Supreme Court declared the law unconstitutional the House and the Senate, trying to comply with the spirit of the law, compromised on a fiscal 1987 budget supposedly under the limit, but the president balked again on the defense cuts.34

By 1992 budget balancing had become a hot issue with third party candidate Ross Perot hammering away at it. Labor Secretary Robert Reich got an explanation on March 18, 1993, from Marty Sabo [D.-Minn.], chairman of the House Budget Committee as to why Congressional Democrats wanted to cut spending even more than the President recommended. “As long as the Republicans were in the White House, the business community didn’t talk about the budget deficit,” Sabo said. When big business saw Democrats about to take over the White House along with both houses of Congress, he added, they figured they wouldn’t get more military spending “and certainly no more big tax cuts for corporations or for the wealthy....Suddenly all they

want to talk about is the national debt.” When Reich asked about the Democrats in Congress, Sabo declared: “We’re owned by them. Business. That’s where the campaign money comes from now. In the 1980s we gave up on the little guys. We started drinking from the same trough as the Republicans....”35

The much discussed “peace dividend” after the Cold War ended was elusive. According to Laurence Korb, a former assistant secretary of defense, now affiliated with the Brookings Institution, the U.S. is spending, in adjusted dollars, more on defense today than it did in 1955, or 1975, or most years of the Cold War with the exception of the Vietnam and Reagan peaks. The 1996 defense budget was to be approximately $267 billion, or 85% of average Cold War budgets. Even the right-wing, libertarian Cato Institute questioned the need for today’s spending levels. In a July 1995 report, its authors noted: “One of the most tenacious myths, especially among conservatives, is that there has been a dangerously excessive reduction in U.S. military spending since the late 1980s....”36

The “Contract with America” of the 1994 “Republican Revolution” that took control of Congress made a major issue of passing a Balanced Budget Amendment to the Constitution. In 1995 the proposed amendment failed to obtain the necessary two-thirds vote. Senator Mark Hatfield (R.-Ore.) cast the only Republican negative vote and was bitterly attacked by members of his own party. Poll results showed that voters favored the Amendment, but only if Social Security were protected. Several Democratic senators were ready to provide the needed vote for the Balanced Budget Amendment on condition only that Social Security trust funds be protected. They wanted them excluded from budget calculations so that future politicians would be prevented from raiding them.

In his memoirs, Robert Reich, who was Secretary of Labor throughout the four years of President Clinton’s first term, recalled that on June 13, 1995, President Clinton gave a 5-minute TV address calling for a balanced budget in ten years, saying, “It’s time to clean up this mess.”

“What mess?” Reich asked, “We’ve been cutting the deficit for two years running. It’s already less than 2% of national output—the smallest of any industrialized nation, the smallest it has been in two decades....”37

In the 1996 election campaign both major presidential candidates were promising a balanced budget by the year 2002, and early in 1997 the Republican Congress tried again for a Balanced Budget Amendment. As in 1995, if the amendment were worded to protect the Social Security trust funds, there were plenty of Democratic votes available in Congress to meet the two-thirds requirement, but the Republican leadership would not agree.

Policymakers regularly ignore the 1990 law that restored the separation of Social Security trust funds from the budget. For example, with Social Security excluded, the deficit grew $121 billion from 1980 to 1988, but the government put the trust funds in a “unified budget” to report an increase in the deficit of only $81 billion over those eight years.38

The Washington accounting deception that counts the trust funds as part of the budget is dishonest bookkeeping and illegal under Section 13301 of the Budget Enforcement Act of 1990, according to its coauthor, Senator Ernest F. Hollings (D-SC). The bill that Congress passed and President Bush signed into law includes this language:
The concurrent resolution shall not include the outlays and revenue totals of the old age, survivors, and disability insurance programs established under Title II of the Social Security Act or the related provisions of the Internal Revenue Code of 1986 in the surplus or deficit totals required by this subsection...
“That says in plain language they can’t use the trust fund to cut the deficit,” Hollings observes. “And yet they keep doing it....They call it a ‘unified budget,’ as though that changes something....”39
The 1990 provision was one more step in a continuous effort to correct the treatment of Social Security in the budget. For example, the 1998 Statistical Abstract, in a note at the heading of the federal budget summary 1945-1998 (Table 537), states: “The Balanced Budget and Emergency Deficit Control Act of 1985...moved Social Security off-budget.”

The unified budget has a long history. A column by Edwin Yoder of the Washington Post Writers Group in 1995 blamed it on Lyndon Johnson in 1967, saying, “Social Security receipts were then running well ahead of outlays, and consolidation of Social Security with other budget categories shrank the apparent deficit then attributable to the cost of the war in Vietnam.”40 My own recollection of the timing is that it occurred during the Eisenhower administration, and this agrees with footnote 4 to the table of Receipts and Outlays of the Federal Government in the 1994 Information Please Almanac: “Beginning 1956, computed on unified budget concepts; not strictly comparable with preceding figures.”41

The overall budget was made to look better due to a 1983 increase in the payroll tax for FICA contributions, as recommended by a commission headed by Alan Greenspan, which resulted in a very large surplus in Social Security funds. Since all tax receipts were lumped together, Social Security surpluses were counted as an offset to the budget deficit. Shakelford and Stamos’ economics text commented, “Many economists and legislators are upset that a large part of the deficit is being paid by the middle and working classes.”42

Because the large surpluses in Social security were being loaned to the Treasury and used to obscure part of the deficit, Senator Daniel Moynihan (D-NY) proposed in 1990 to reduce the payroll taxes to a pay-as-you-go basis. Greenspan, as Chairman of the Federal Reserve Board, opposed this and gave the Senate Finance Committee a complicated explanation describing the extra tax money as forced national saving. President Bush talked of the “brink of insolvency” and threats to “bankrupt” the system.


Senator Ernest Hollings (D-SC) declared in disgust: “When you try to stop a raid, they call it a raid. When you try to defuse a time bomb, they say you are creating a time bomb. How, after all this lying, are we going to make ourselves honest?” The Moynihan proposal lost 60-38.43 In contrast to its handling of Social Security, however, Congress put the savings and loan bailout “off-budget" to hide it from the public.
The interest burden of the debt

For government at all levels, as well as individuals and corporations carrying large amounts of debt, the greatest burden is the growing amount of interest that must be paid. It makes a difference whether debt is incurred for investment or wasteful extravagant living. When people borrow to buy a home or a car or a college education, it is a wise investment, as is business borrowing to build needed facilities.

Unfortunately, government accounting does not tell us whether the borrowing is for investment. Much of the $4 trillion debt inherited by President Clinton had been piled up during the 1980s to pay arms manufacturers for weapons that were not needed and sometimes didn’t even work. The Ames spy case revealed that the arguments for big spending on defense were based on false information from known double agents that was passed on as true by the CIA to policy makers.

Another large part of the debt was incurred to cover revenue lost by the selective tax cuts in the 1980s. Some of the windfall to those who got tax cuts was put into long-term U.S. government bonds. The 30-year government bonds issued in 1953 at 3-1/4% interest matured in 1983 and were refunded at 12%, locking in a high interest rate for three decades.44 Sadly, those bonds will be costing taxpayers huge amounts of interest for many years to come, and so long as the government honors those bonds nothing can be done about it.

Reich described the accounting problem this way: “The...federal budget...is almost meaningless—an imperfect

accounting device. It excludes future liabilities like federal pensions and veterans’ benefits, and it also excludes assets like the value of the federal government’s landholdings, buildings, and facilities. Worst of all, it treats all spending the same—whether a crop subsidy to a rich farmer or college aid to a poor kid....

“The GI Bill made college affordable to a whole generation of returning World War II veterans and propelled much of the economic growth of the 1950s and beyond. The expense was justifiable, even though the federal deficit was a much larger percentage of the national output then than it is now....”45
How can we balance it—or should we?

It is widely assumed that balancing the budget would be a good thing, but as an economic question it is debatable. When almost everybody agrees, as they did in the Middle Ages about the earth being flat, it may be time to raise questions. The official “unified” budget figures only tell us, more or less, the government’s net cash flow. This information is useful mainly to apply Keynesian principles for stabilizing the national economy, running a deficit during a slump and a surplus during a boom. Balancing the budget every year would not be good for America. In time of recession, when tax collections decline and unemployment claims rise, the government would be forced to cut its outlays, making the recession even worse.

Several Nobel prize winners in economics, including Yale economist James Tobin, have declared a balanced budget constitutional amendment would be a dangerous thing. William Vickery, emeritus professor of economics at Columbia University, had he not died of a heart attack a few days after receiving the Nobel prize in economics in October 1996, planned to campaign against “the mania for budget balancing” that he argued was costing people their jobs.

Cavanaugh, an economist who was responsible for debt management in the Treasury Department, has declared (in his

book already cited) that preoccupation with adding to the national debt is misdirected, although, of course, spending should not be wasteful. He added that the notion we are passing on a burden of debt to future generations is a myth. Our grandchildren inherit not only the debt but also the enormous assets of this nation.

He illustrated this point by showing that the federal debt at the end of World War II, roughly equal to defense spending 1942-45, was never paid off. That debt of about $270 billion, plus annual interest at the Treasury’s average cost of 6%, is about equal to the $5 trillion estimated federal debt at the end of fiscal 1996. Despite that debt, the U.S. had its most prosperous half-century ever.

The economic burden of the war was borne at the time: no new cars, very limited gasoline, crowded housing and scarcities of consumer goods. Saving the money they couldn’t spend, Americans bought government bonds, collectively owing the debt to themselves. If the next generation inherited debt, it also inherited those same bonds and the nation’s vast assets, including the freedom their parents bought for them with sacrifices of lives as well as material goods. Cavanaugh proposed a “program budget” that would exclude interest payments because they are uncontrollable and focus attention on spending and taxes instead.

The idea that national debt is a burden was listed by Dr. E. J. Mishan of the London School of Economics and Political Science as Number 5 of “21 Popular Economic Fallacies” in his 1969 book of that title. He quoted former President Eisenhower, criticizing President Kennedy in 1963: “In effect, we are stealing from our grandchildren in order to satisfy our desires of today.”

Mishan countered that government borrowing does not change the amount of real goods and services produced. “Real capital can be passed on to the future, but there is no way of getting real capital from the future!...If the present generation consumes more of its income the level of consumption will grow less in the future....To call this a burden on future generations makes no more sense than to call the opposite a sacrifice of the present generation. Both terms are meaningless without an agreed norm for the path of consumption over time.”46
Another author has pointed out that budget balancing could be hazardous to our national economic health. Frederick C. Thayer, professor emeritus at the University of Pittsburgh, wrote in the Jan..-Feb. 1997 issue of The American Prospect that all six major depressions in the U.S. came after budget surpluses and reductions in national debt. There has been no depression since the Great Depression of the 1930s, and all nine recorded recessions since World War II have immediately followed deficit cuts relative to GDP.
6. SOCIAL SECURITY AS SCAPEGOAT
Social Security has been included among the human resources categories of government spending blamed for federal deficits. Powerful interests trying to deflect budget cuts from their own favorite items have deliberately created confusion in this area. They have used “entitlements” as a code word to raid Social Security, despite its popularity as one of the most successful government programs especially helpful to middle and lower income groups. Although other items such as Medicaid for the poor and various welfare programs fall into the budgeteers’ category of “entitlements,” they are quick to point out that Social Security and Medicare are the largest items.

Cavanaugh, having tackled conventional wisdom about the national debt, also pointed out that Social Security “has nothing to do with federal deficit or debt. The trust fund is fully invested in the safest securities in the world. The welfare of future retirees depends on the productivity of workers in the future, based on present care to the health, education and welfare of today’s children.”47

Social Security is a contributory pension plan, also helping widows, orphans and disabled persons. Just as corporate raiders have diverted employee pension funds, some editors and politicians would like to defraud those who have paid Social Security contributions all their working lives. Military pensions likewise have been earned. They were promised for service to our country, often hazardous and usually at much less pay than civilians. When the fighting is over, “Support Our Troops” becomes a less popular slogan. Pensions of civilian government workers were part of the terms of their employment, so it would be dishonest to default on them. (There seems to be no movement to limit the over-generous pensions and other benefits enjoyed by ex-presidents and ex-members of Congress.)

It is wrong for editors and politicians to lump these earned pensions in with welfare programs under the catch-all phrase “entitlements.” On the other hand, such handouts as farm price supports and various business subsidies, although unearned, are generally omitted from the attacks on “entitlements,” unlike the Social Security and military pensions that have been earned by contributions and service. Deposit insurance, to the extent it exceeds payments by depositors and/or the financial institutions, is another subsidy that has not been earned and is seldom included in attacks on “entitlements.” Apart from what budget analysts call entitlements, there are other expenditures that are similar in that they tend to grow spontaneously, such as multi-year military contracts, but they also escape examination in these debates.

Even Lester Thurow, the MIT economist who is sound on so many other points, has joined the intergenerational war-mongers denouncing the elderly as robbing the young. Citing the 41% of their income received “from government” by those over 65, he brushes off the life-long payments they made into trust funds, and declares flatly, “This...has made the elderly into one-issue voters [on] pension payments or health care benefits.”48

Leading the propaganda effort to turn youth against their grandparents are organizations largely funded by the financial community, which has its own profit interest in privatizing Social Security. Of course, it is legitimate from time to time to adjust the system as needed, and this has been done over the years. For example, on January 20, 1983, a blue-ribbon commission headed by Dr. Alan Greenspan, then president of an economic consulting firm and later named Chairman of the Federal Reserve Board, reported that things had not gone well since President Carter and the Congress made changes “guaranteeing” the solvency of the system in 1977. The commission presented recommendations to eliminate shortfalls through 2056.49

By January 1997 new predictions based on different assumptions advanced to 2029 the date the trust funds would run out. The Advisory Council on Social Security reported a split opinion of three different solutions, varying chiefly in the extent to which Social Security contributions would be diverted from government bonds to the stock market.
In the many discussions of the problem, nobody seemed to remember that Congress drained the trust funds in the election year of 1972. They made a “miscalculation” doubly compensating for inflation (which change was phased out by 1977 legislation, but people born before 1917, including many of the politicians who made the “error,” continued to receive the bonus). This was the basis of the “notch” controversy that reached a peak in the 1980s. Without that error the trust fund would show an even greater surplus.

Although warnings about the effect of baby boomers retiring have emphasized the declining ratio of workers to pensioners, Robert Ball, former Social Security commissioner, and Henry Aaron, director of economic studies at the Brookings Institution, maintain “the true measure of the burden of the dependent population is the ratio of the dependent, old and young, to active workers....The dependency burden will never be as high as it was in 1960, when the baby boomers were children [904 per 1000 active workers vs. 707 in 1993, 656 in 2010, 789 in 2040, and 826 in 2070].” Economist Frank Ackerman quipped: “If we could afford to live through the childhood of the baby boom generation, we can afford to live through their retirement.”50

Six members of the sharply divided Advisory Council on Social Security reported in January 1997: “Social Security is not facing a crisis. The program, as currently structured and financed...can pay full benefits for another 30-plus years....Even 75 years from now, current-level taxes would cover about 70% of the cost of the program.” As he quoted them, Robert Reno of Newsday added his comment: “There is also the possibility that the system may not need fixing at all. Predictions of a Social Security deficit in 30 years are based on the guesses of the system’s trustees, a body that is paid to be super-cautious.”51

Scare stories about the system crumbling in the future are based on very iffy projections. Should the economy regain the health it lost since the mid-1970s, many problems would disappear. Nevertheless, putting Social Security reserves to work in the private sector might be a good idea, if it were done along the lines of the successful Thrift Savings Plan for voluntary stock and bond fund investing by federal employees.

In 1986 the Congress authorized stock index fund investments (without voting rights) by the Federal Retirement Thrift Investment Board, which administers the Thrift Savings Plan for federal employees. Cavanaugh, who was the first executive of the board, wrote that they “encountered no significant problems as we selected an index (the S&P 500), obtained competitive bids from large index fund managers, and established a highly efficient stock fund with minimal administrative expenses. I see no reason why the Social Security trust fund should not have the same stock investment advantage as the Thrift Savings Plan.”52

That, of course, would not generate the huge commissions sought by the lobbying effort of Wall Street (in league with the Cato Institute, the National Center for Policy Analysis, the Institute for Research on the Economics of Taxation, Third Millennium, and the National Development Council) to get its hands on everybody’s FICA contributions.

Eisner saw irony in the efforts of capitalists to have the government trust funds invest in the private sector. He saw the possibility it might be carried far enough to “leave us with an economy in which public ownership—by the government trust fund—would replace the private profit, private capitalist system....Are advocates of using the trust funds to ‘invest’ in other than government securities really closet socialists?”53

Another suggestion by some politicians and commentators has been a “means test” applied to Social Security. That is, a government-defined level of poverty would be a requirement to receive benefits. For the sake of cutting benefits to those who, by diligence or luck, have private income in retirement, there would be a means test that would require a vast bureaucracy to pry into the financial affairs of every beneficiary. It seems to me the cost of this effort might easily offset any reduction in benefit payments. Certainly it would undermine the original purpose of Social Security, which was to let the elderly keep some dignity and self-respect instead of suffering the humiliation of private or public charity. Some have also proposed a means test for military and civil service pensions. In that case the government would be going back on its word like the private

sector employers whose pension scams brought about government regulation.

Another proposal affecting Social Security involves the Consumer Price Index (CPI). Politicians trying to cut Social Security, military pensions, etc., have been floating the theory that the CPI exaggerates inflation. This deserves further discussion in another chapter on inflation.


7. WHOSE WELFARE?


Welfare reform was a powerful political slogan offered as a remedy for federal deficits. Nothing gets some hard-working people so upset as the thought of others living a life of idleness from government handouts. Many of them know someone, perhaps a relative, who seems always to be on welfare. Then they shop in a supermarket and look for bargains in less expensive food, only to reach the check-out counter behind a well-dressed customer who pays for a shopping cart full of steaks with food stamps and then drives away in a luxury car.

While some such perceptions may be faulty because of lack of full information, most of them are probably correct and lead to resentment that is justified. That resentment has been fanned by political propaganda. Typically, the charge is made that taxes are high because the budget is bloated with entitlements—a. budget planning category that campaign rhetoric has turned into a term of derision. Social Security does not belong in this discussion because it is self-financed and the revenues from workers and their employers have always exceeded the benefits paid out each year.

In 1980, when poor mothers receiving aid for dependent children were being denounced as “welfare queens,” welfare made up much less of the budget than people thought. Total federal outlays, after excluding Social Security, amounted to $472 billion. The “income security” category of $87 billion included $27 billion of federal employee retirement and disability that should not be considered welfare. Taking that out, there was $60 billion of what might properly be described as welfare.

Bottom line: all these “income security” items, including housing assistance, food and nutrition, aid to families with dependent children (AFDC), unemployment benefits, etc., added up to 12.7% of federal outlays (net of Social Security) in 1980. For comparison, it was 27.7% for the military, 15.8% for interest on the public debt (mostly incurred for past wars), and 7.4% for

agriculture.

In 1994, when Republicans captured the Congress, welfare outlays as defined above were 13.3% of federal outlays (net of Social Security), military 23.5%, interest on the public debt 26%, and agriculture 5.3%. This information is calculated from the figures in Table 522 of the 1995 Statistical Abstract of the U.S. The welfare amount of about 13% is hidden from the public by the continued government use of the “unified budget” despite the previously described Budget Enforcement Act of 1990.

The pie charts printed by the IRS in its 1997 tax instructions showed a total of 56% of federal outlays in the entitlements categories (38% for Social Security, Medicare, and other retirement plus 18% for social programs) with only 20% for “national defense, veterans, and foreign affairs” and 15% interest on the debt.

Likewise, pie charts of the proposed budget from the White House for 1999 showed 53% for entitlements (35% Social Security and Medicare plus 18% other), 15% for defense, and 14% for interest. This improper “unified budget” approach is seriously misleading and loads the dice against payments that go to poor and middle-income individuals and families. It provides ammunition for the conservative organizations sponsored by corporations and wealthy individuals.

The benefits bestowed on corporations by the government are not conveniently grouped in the budget like the ones that are usually thought of as welfare. Their general extent, however, can be judged by some examples, drawn mainly from the best selling 1992 book, The Government Racket: Washington Waste from A to Z by Martin L. Gross, which altogether lists possible savings of $225-340 billion, as I add them up.54

Much of the saving targeted by Gross has to do with general inefficiency of operation, of which I have some first-hand knowledge. As a civilian financial officer at a Navy installation, I learned that Navy accounting (and government accounting in general) is structured in a way that no private enterprise (nor its auditors) would tolerate, perhaps in a deliberate attempt to confuse outsiders, certainly confusing to those inside the system.

You might think that a commander would get a pat on the back for giving money back to the taxpayers. Not so. A national training program in the military urged spending at least 99% of the budget one way or another, to avoid unspent appropriations leading to the conclusion that “if you didn’t spend it you didn’t need it, so we’ll give you less next year.”

Waste permeates government at all levels, but I’ve seen dedicated and capable employees in federal and state government who are powerless to reform the system. Gross claimed waste of $68 billion annually in excess overhead, mostly hidden in the $170 billion “other services” category. Regarding the $56 billion agriculture budget, Gross noted that while farms and farmers had declined to one-third in 50 years, with half the farmers becoming part-timers, farm bureaucrats had multiplied threefold. He projected that by 2040 there would be one Agriculture Department worker for each full-time farmer.


Corporate welfare

Other leakage listed by Gross includes some large items ending up in private pockets, such as:

  • $20-40 billion annually estimated cost of Medicare fraud that could be recovered by tougher administration.

  • $32 billion worth of cellular phone licenses alone have been given away but those for pocket phones could be auctioned off for many billions, if not given away by the FCC for nominal fees.

  • $30 billion in agricultural subsidies, that also cause consumers to pay higher prices. Although a 1980 law supposedly limited payments to $50,000 per individual, Gross concluded “that the largest and wealthiest of farmers continue to receive the major harvest of taxpayer money.”

  • $10-20 billion in subsidized interest and write-offs of loans by the Farmers Home Administration under the Agricultural Credit Act of 1987. Although some part of agricultural outlays benefit small family farms, the

overwhelming bulk of the expenditures go to subsidize corporate agribusiness, which has come to dominate farming in the United States.

  • $5 billion of new construction and $2 billion to lease office space instead of using the 15 million square feet of vacant space in federal buildings and moving government employees into dozens of military installations being closed down, as suggested by a government auditor. The money goes to construction firms and owners of leased space, as well as $100 million for non-government buildings at private institutions, such as universities.

  • $5 billion of consulting contracts, about most of which government agencies lied when GAO auditors investigated. In fact, the spokesman for the Senate committee behind the audit said it could be as much as $20 billion.

  • $3 billion paid to banks for defaulted student loans and almost $3 billion in interest subsidies, “even though the banks take absolutely no risk.”

  • $2.3 billion operating loss of the Export-Import Bank, plus default losses, on subsidized low-interest loans to foreign companies who buy American exports.

  • $2 billion annual deficit of the Forest Service selling timber below cost and building roads for wood-products companies to get access to bargain timber.

  • Huge losses of public assets in the form of land not showing up in the budget due to the Mining Law of 1872 that still allows sales at $2.50 per acre. Gross cited one parcel sold by the Interior Department for $42,500 that was resold a few weeks later to an oil company for $37 million.

  • Nearly $1 billion for the Small Business Administration which loans not to really small businesses but to those that typically gross $1 million or more with very good cash flow. In 1990 and 1991 SBA subsidized almost a half billion dollars of loans

to prosperous doctors, dentists, lawyers, accountants, and other professionals.

  • $3 billion excess cost in each census year because of gathering data useful mainly to industry.

  • $200 million for advertising agricultural products overseas, including ads for Sunkist citrus, Blue Diamond almonds, Gallo wines, Pillsbury, Dole, Welch’s, Wrangler blue jeans, Tyson chickens, and McDonald’s hamburgers.


More corporate welfare

ABC-TV news has reported other waste, such as $1.2 billion for VIP planes and supplemental Defense appropriations the Pentagon says it doesn’t need.

Budget experts quoted by Common Cause estimate that federal corporate welfare payouts will amount to $265 billion over the next five years—averaging $53 billion per year.

Besides direct subsidies, there are also the special tax benefits that have made the tax code such a monstrous maze.

Another handout cited by Common Cause is the $70 billion gift of the digital broadcast spectrum free of charge to the broadcast industry instead of subjecting it to auction.

The Democratic Leadership Council (DLC), the most conservative group in the Democratic party, published, in 1994, a list of unwarranted tax breaks and subsidies for particular companies and industries, totaling more than $100 billion a year. As described in his memoirs by Labor Secretary Robert Reich, they included “$2 billion a year going to oil, gas, and mining companies for no reason whatsoever, $4 billion a year to pharmaceutical companies that create offices in Puerto Rico, $400 million to Christmas-tree growers, windmill makers, and shipbuilders, and $500 million a year to corn-based-ethanol refiners.

“Also...the $2-billion-a-year tax break for the insurance companies, $900 million for timber companies, $700 million for the dairy industry, and $100 million a year to large companies for advertising abroad. On top of that are billions of dollars of special

breaks for multinationals that make their products outside the United States....

“If private corporate jets had to pay landing fees at airports as commercial jets have to do, they’d pay $200 million a year. If wealthy ranchers had to pay the full cost of grazing their cattle on public lands, they’d pony up $55 million a year. If corporations couldn’t deduct the costs of entertaining their clients—skyboxes at sports arenas, theater and concerts, golf resorts—they’d pay $2 billion more each year in taxes.”55

Warren Buffett, himself a billionaire, has called such benefits “food stamps for the rich.”56 Corporate welfare makes “welfare queens” look like pikers.




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