Starve The Beast

What is happening now with respect to our national economy is not incompetence or mismanagement, it is a planned strategy. Economists call it "starving the beast." The plan is to cut taxes for the wealthy and take on a load of national debt. It is a highly regressive strategy that has two benefits: it funnels money from most of the country to the very rich with tax restructuring and destroys social programs because when the time comes to pay off the debt you cut domestic spending that disproportionately benefits the public instead of raising taxes. (You increase what is called defense spending, another way to shift wealth to the rich. The US spends more than the next 12 countries combined on defense.) [1]

We are single mindedly focused on lowering taxes in this country. But the real question that we should be asking ourselves, and is asked in many European economies, is what we are getting out of the system with respect to what we pay in. Many Americans probably can not comprehend something like Finland’s economy: They have the highest taxes in the world, but they also have one of the best economies with higher standards of living than the US. The World Economic Forum has ranked them the most competitive economy in the world in recent years and they have robust spending in R&D. They also have enormous safety nets that allow parents to take months of paid maternity/paternity leave and soften unemployment.[2]

If you could keep 100% of your taxes but there were no police, no highway maintenance, no education, no garbage collection, etc. then you have lost more than you have gained. Likewise if you could pay the same taxes you are now but receive better public services then you have received a tax break, and this is felt most heavily by poor people. For example, if we cut subsidies (and taxes) for public transportation that result in higher bus fares then that is a tax increase for the poor. In the next few years they will cut domestic programs to pay off the debt rather than jack up taxes directly. (For example, one of the first Congressional acts after Katrina was to vote on cutting food stamps to pay for the reconstruction.) The higher up you go on the economic ladder the less you benefit from public services. Most people do not think of it in these terms. Part of that reason lies in the cultivated perception that every government funded program is grossly inefficient compared to private.

That perception is simply not true. For one thing the US economy has needed a dynamic state sector to survive. Today’s high tech industries like aeronautics, electronics, semi-conductors, computers, etc. would not exist were it not for almost total public subsidization or R&D for years. And the public is being compelled to fund tomorrow’s technology, but we can leave that aside for now to examine programs that exists wholly in the public sector. During the 1980s England and Chile privatized their public safety nets for retirement, what we call Social Security. The British now regret this decision as increased overhead costs and fees for investment firms have eaten up much of their benefits. They are facing an elderly poverty problem because of their privatized system. (Chile faces similar problems.) British planners and economists applaud the efficiency of the US’s public system and are modeling planned reforms based on what we have.

American health care lags behind many countries because of private administrative costs. A recent report on world health care demonstrates the effects of this. They found that the US “spends twice the OECD average on healthcare” and that “countries that spend substantially less than the United States have healthier populations.” Significant segments of the US population have third world level infant mortality rates on par with impoverished countries like Kerala. Malaysia has the same infant mortality rate as the US. In terms of health care the US is off the charts with respect to other industrialized nations. The crucial issue is not quality, but “access to care.” Even when evaluated selfishly, this is bad for individuals. The costs on society to take care of and make up for lost productivity that untreated people incur eat into everyone’s bottom line. [3]

Joseph Stiglitz, a Nobel economist and former head of the World Bank, has documented the short comings of a market system: in the real world market economies do not promote equality, health, or social responsibility. He rightly notes that truly free markets do not and can not exist in the real world. He comments are worth quoting at length,

”American economists tend to have a strong aversion to advocating government intervention. Their basic presumption is often that markets generally work by themselves and that there are just a few limited instances in which government action is needed to correct market failure; government economic policy, the thinking goes, should include only minimal intervention to ensure economic efficiency.

The intellectual foundations for this presumption are weak. In a market economy with imperfect and asymmetric information and incomplete markets -- which is to say, every market economy -- the reason that Adam Smith's invisible hand is invisible is that it does not exist. Economies are not efficient on their own. This recognition inevitably leads to the conclusion that there is a potentially significant role for government. [4]

The rich know and understand how this works, and the politicians that represent their interests exploit the dynamics. They don’t need good public health service; they can afford the best doctors. They don’t need social security. They don’t use public transportation. Political strategists advise politicians on how to manipulate public opinion while they starve the beast. (For example, in 2004 GOP strategist Frank Luntz advised Republican policy makers on how to cut domestic programs and give tax breaks to the rich: “The fact is, most Americans appreciate their local government that picks up their trash, cleans their streets, and provides police and transportation services..." to cut these programs "remind voters again and again about Washington spending, Washington waste, Washington taxation, Washington bureaucracy, Washington rules and Washington regulations.")

The point is that this is a calculated strategy, it is working, and the consequences will be felt by years, most harshly by the poor. I think most Americans are woefully unaware of the underlying issues. Complaining about taxes is irrelevant; taxes are the shadow of the substance. The current policy of bankruptcy is designed very specifically to benefit a narrow group of moneyed interests to the detriment of us all.

[UPDATE: I corrected an earlier mistake, the US spends more than the next 12 countries combined, not the rest of the world combined. According to the article James cited, (as of 2003) we are only 47% of total military expenditures world wide. 2004 figures here. We are also the world's biggest arms dealer by far. My mistake.]

Notes:
[1] See http://www.globalsecurity.org/military/world/spending.htm for FY 2004
[2] Ford, Peter. Christian Science Monitor. October 26, 2005
[3] United Nations Development Programme. September 2005
See also Gladwell, Malcolm. The New Yorker. August 8, 2005
[4] Stiglitz, Joseph. Foreign Affairs. November/December 2005
For more of his analyses see Stiglitz, Joseph. Globalization and its Discontents. 2000
See also Krugman, Paul. The Tax-Cut Con. http://www.pkarchive.org/economy/TaxCutCon.html