Refusing to Reinvest in the Country

I really have come to believe that The Powers That Be have lost sight of the fact wealth is the lifeblood of any the economic system and that if it stops circulating the economy itself will die. 

Here in the US the latest mantra has to repeat the wholly unsupported claim that the rich are “job creators” and that if the rich have their taxes raised then they will stop creating jobs.  The belief seems to be that the richer we make the top 1%, the more wealth magically will be transferred to the rest of the economy.  Of course, this doesn’t work and it hasn’t worked, despite 30 years of increasing income inequality.

Over at Digby’s on Monday, David Atkins had a piece up asking “Why Are Young People So Upset and Disenchanted?" and breaking down the federal budget to determine how much money our government is reinvesting back in the nation’s economy.  Of a $3.5 trillion budget for fiscal year 2010, government spending breaks down as follows:

            --$1,120 billion consisted of by military expenditures and veterans’ benefits;

            --   $707 billion consisted of Social Security payments;

            --   $732 billion consisted of Medicare, Medicaid, and the Childrens’ Health 

                           Insurance Program;

            --   $496 billion consisted of other safety net programs;

            --   $210 billion consisted of interest payments on our existing debt.

That totals $3.265 trillion dollars, the vast majority of which is devoted either to military expenditures – which have the least economic stimulative effect – or to maintaining the elderly and the less fortunate, which (don’t get me wrong) is a laudable goal and the only decent thing a civilized people can do but also does not reflect an investment in the nation’s future.

That leaves a grand total of $235 billion to be spent on every other federal expenditure:  law enforcement, NASA, the Center for Disease Control, education, technology, medicine . . . everything.

But it gets even worse.  A federal budget of $3.5 trillion is about 24% of our GDP for FY2010, which means our GDP was about $14.853 trillion.  But as Atkins points out, we only collected tax revenues for the year of $2.2 trillion, and borrowed the remaining $1.3 trillion.  That means the US had an effective tax collection rate of only 15.08% of its GDP in FY2010.

This is astonishingly low.  Here is a chart comparing tax collection rates for various countries as compiled by the OECD, which indicates that in 2006 America’s effective tax collection rate was 28% -- still generally low compared to the rich European countries but nearly twice the figure for 2010.

The bottom line is that the US collects low taxes as a percentage of its GDP in comparison to other industrialized countries.  If the nation’s GDP were being shared equally with the population, i.e., if increases on productivity were being realized as increased wages and benefits by the population as a whole, this might not be so bad.  If we all were sharing equally in the economy’s growth, then there might not be any need to tax the wealthy and in order to reinvest that money back into the economy and keep its lifeblood flowing.

But, of course, that’s not the case:

(Click to enbiggen.)

Instead, we see that from these charts that almost all the increase in income for 30 years has gone to the top 1% (the top 20% also have realized an increase, but that quintile includes, of course, the top 1% . . . which largely counts for what is presented as a gain by the top 20%). 

So in 30 years we have been stuck with an economic system that concentrates its wealth in the hands of a very few where – because we have largely reduced the progressivity of our income tax schedule by slashing taxes for the wealthy – all that wealth tends to remain. 

This is not only inequitable, but by allowing this money to pool in the hands of the very few The Powers That Be effectively are gutting and hollowing out the nation’s economic system by preventing its lifeblood from flowing.  

What are seeing -- what we have been seeing for 30 years -- is not the growing of an economy but the plundering of an economy.  Life the farmer who doesn't practice crop rotation, what to pass on to his children may long have been depleted by the time it is their turn to run the family farm.  No wonder Atkins was able to identify why young people are so disenchanted with the system:  “Even if they don’t know the details, young adults understand that they’re getting screwed.”