Wheat from the Chaff

Tea Party Contradictions

One of the most fascinating examples of the absurdity of US politics has been the Tea Party movement. Populated largely by angry and frightened working class and middle class (white) Americans, the movement proves that contradictions are rarely a barrier to political action.

At the core of the problem is a series of demands by the Tea Party that have little to do with the interests of its members: less government regulation, lower taxes (especially for the upper class and corporations), and cutbacks to social programs like Medicare. These interests do coincide with the upper class and corporate sector, but not with Americans living from cheque to cheque, and from housing payment to housing payment.

It gets worse when you consider that deregulation and upper-class tax cuts are at the core of the economic meltdown in the United States. But the Tea Party is undaunted: the solution to our problems is to reintroduce the policies that caused the problems in the first place. This sounds like Santayana's definition of fanaticism.

Why isn't the Tea Party an angry mob of left-wing populists? Why aren't they demanding an end to monied interests and corporate lobbyists? Part of the answer is that the corporate and upper-class funding for the Tea Party has been partially hidden. Yet repeated, high-quality exposés of Tea party financiers like the Koch Brothers have started to shed light on the self-interest that compromises the rationale of the Tea Party. Nevertheless, the Tea Party continues on, revelling in its political power within the Republican Party and apparently oblivious to its corporate benefactors. I suppose part of the answer to the TP's self-cancelling populism can be found in an economic and political maelstrom that obliges its victims to seek an easy scapegoat; you go with what you know. And, in the United States, what they know are the centuries-old platitudes about the dangers of government and taxes, platitudes eagerly reinforced by Fox News.

Humour may be the best retort, as exemplified by Barack Obama's evisceration of Donald Trump. In response to the contradictions of the Tea Party, two excellent American cartoonists, Cole Bennett and Steve Greenberg, have provided many biting political cartoons:

 

More anti-Conservative links!

Making the rounds is a humourous attack on Stephen Harper and the Conservatives (but mostly Stephen Harper); it's the aptly-named website shitharperdid.ca. It covers some of the same ground as my own list, but it does add a few new whoppers. The art work and slide show format are things I can't compete with! :-)

Another interesting story examines the "corporate income tax cut = productivity" myth that I've been talking about. A Globe and Mail analysis found that, lo and behold, corporate income tax cuts in the last decade have not led to the land of milk and honey.

The key passage is the following:

[A]n analysis of Statistics Canada figures by The Globe and Mail reveals that the rate of investment in machinery and equipment has declined in lockstep with falling corporate tax rates over the past decade. At the same time, the analysis shows, businesses have added $83-billion to their cash reserves since the onset of the recession in 2008.

The NDP vote in BC

The following chart from Will McMartin's most recent Tyee article offers some interesting insights into BC politics:

The first thing one notices is that the NDP's support has remained relatively constant over the last 40 years, aside from the 2001 debacle. In 9 of 10 elections, the NDP share of the popular vote has remained within a 7% range, from 39% to 46%. And in 7 of 10 elections, that range has been less than 3.5%. In other words, NDP supporters are a fairly consistent and committed group of voters.

What's also interesting is that the NDP's three electoral victories (1975, 1991 and 1996) were based on some of its smallest popular votes shares. Conversely, the best three elections in terms of vote share still resulted in electoral defeats to Bill Bennett's Social Credit Party.

What does this mean for the NDP? First, the best strategy for the NDP is to pray for the corruption of the right wing vote. In all three NDP victories, credible conservative alternatives helped cleave away crucial votes from the dominant right wing party (1975 and 1996), or there was simply no credible right wing party at all (1991). Another strategy, and something I've discussed before, is to address topics that are usually not associated with the NDP. Like the Liberals in 2009 - who successfully claimed new ground with the environment - the NDP needs to take economic policy seriously. This doesn't mean surrendering to the business sector and its destructive tax-cut monomania, but it does mean offering progressive ideas that will improve prosperity and productivity.

The chart also implies one other point, and one that McMartin's article effectively argues: the NDP is not likely to fall apart because of the departure of Carole James. The numbers above suggest a consistency that stands apart from any leader.

Buffett Tells ABC Rich Americans Should Be Paying "A Lot More in Taxes"

Billionaire Warren Buffett has come out and said the equivalent of 2+2=4. Or =666, if you're a neo-liberal hell bent on even more tax cuts.

In a recent interview, Buffett said, “I think that people at the high end -- people like myself -- should be paying a lot more in taxes. We have it better than we’ve ever had it.” In opposition to the trickle-down economics which has pervaded American thinking for decades (and particularly the massive George Bush tax-cut agenda), Buffett responded, "The rich are always going to say that, you know, just give us more money and we’ll go out and spend more and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.”

Of course, don't feel too badly for the wealthy. Even the Obama administration is promoting a "compromise". The upcoming tax cuts promised by the Bush Administration will still go through, up to the first $250,000. This means that the poor, working class and middle class will not be able to take full advantage of the proposed tax cut. You guessed it: only the upper middle class and wealthy can fully utilize the benefits.

An analysis of the US economy by Robert Reich

I would encourage you to download this speech by Robert Reich. [Right-click on the link and choose "Save Link As" or "Save Target as".] It's a cogent Keynesian analysis of America's current economic situation, except that it's also a near-perfect Marxian analysis, too, aside from the Keynesian interventionist strategies. Reich's key argument is that inequality is bad for business, and unless America can address this fundamental challenge, all of the secondary problems will be insoluble. The irony is that, in the end, Reich copies much of David Harvey's Marxist analysis of the fundamental contradictions of capital accumulation. The only real difference is that Reich wants to save capitalism, while Harvey has no such allegiance.

One interesting contribution by Reich is his discussion of the "three coping mechanisms" that the average American household has been using over the past 30 years to compensate for the effective decline in wages:

1. moving women into the workforce
2. making men work more overtime (a great source of "improved" US productivity)
3. borrowing money against home equity

Reich asserts that these mechanisms have, up to now, allowed Americans to ignore the problems of inequality. However, these mechanisms are now spent, and it's time American politicians own up to the fundamental problem: the engine of the American economy - the average consumer - is no longer capable of spending the money that makes economic growth possible.

The Neo-Liberal Agenda: The Effects in BC, Part 2

In my last entry, I wrote about the pernicious attempts by the BC Liberals (and other neo-liberals) to promote tax cuts on the basis of improvements in productivity. I explained that these productivity increases simply haven't happened. This, in turn, suggests that Campbell's tax cut agenda is bogus and self-serving

The question, then, is what has come of the tax cuts that Campbell's government initiated almost immediately after coming to power in 2001?

The best answer is the same answer that we see in the United States: a concentration of wealth and income that leads to inequality.

The following is a chart from the federal government. The richest quintile in BC made, on average, 10.1 times the average income of the poorest quintile. The rest explains itself.

At this point, a left-wing analysis of our economy really starts to make sense.

The Neo-Liberal Agenda: The Effects in BC, Part 1

I've talked at length about the failure of the neo-liberal agenda to increase productivity and high-quality employment, particularly in the Canadian context. But do these lack of economic benefits pertain to BC?

The Fraser Institute certainly doesn't think so. In a recent editorial puff piece in the Vancouver Sun - surprise, surprise - two writers from the F.I. extol the virtues of the BC Liberal government:

... Shortly after coming to power in June 2001, Campbell implemented major tax cuts on both personal and corporate income and scheduled additional cuts thereafter. Specifically, in his first budget (2001), Premier Campbell enacted a 25-per-cent across-the-board reduction in personal income tax rates, followed by more cuts in 2007 and 2008. The result was a significant improvement in incentives for British Columbians to work, save, invest, and be entrepreneurial.

His 2001 budget also reduced the general corporate income tax rate to 13.5 per cent from 16.5 per cent (effective in 2002); later reductions dropped the rate further to 10.5 per cent in 2010. Thanks to these and other business tax cuts (i. e. elimination of the corporate capital tax) B.C. now has a more competitive business tax regime.

Controlling government spending has also allowed Campbell to better manage government debt. From 2001-02 to 2009-10, Campbell's government generally balanced the books and on average recorded a small surplus (0.13 per cent of GDP). Over the same period, it reduced B.C.'s net debt to 15.7 per cent of GDP in 2009-10 from 18.5 per cent of GDP in 2001-02....

I won't go into the massive capital infrastructure costs that are not part of the Fraser Institute's accounting of our provincial debt. The real point is the drivel about "a more competitive business tax regime". In a truly competitive economy, profits and tax savings are supposed to be reinvested to make a business more efficient and more cost-effective. That's how you succeed in a competitive environment. But the problem with the Fraser Institute argument is - surprise, surprise - it's not happening.

In their recent "2010 BC Check-Up", the Institute of Chartered Accountants of British Columbia - no friends of progressive policy - offer very different conclusions about BC's "Golden Decade". To be sure, they do agree that productivity is important:

Improving productivity should be the cornerstone of any provincial economic action plan, as productive and efficient businesses have additional capital to reinvest in both their workforce and new machinery and equipment. A productive economy allows BC’s businesses to better compete internationally and will drive the province’s long-term economic health.

Unfortunately, BC isn't doing particularly well in terms of productivity:

Despite the infusion of investment and human capital in the past five years, BC’s labour force productivity stagnated. All of Canada suffers from a labour productivity gap with the US, but BC’s productivity has remained below the national average for many years. To a large degree, poor productivity explains the lower real wage in BC, as a less productive workforce affects profit margins and decreases the amount of capital that can be reinvested. This deterrent to investment, over the long-term, could erode BC’s ability to compete against the US. One of the more notable results in this year’s BC Check-Up was BC’s productivity gain of 2.1%, the best result in our comparison. However, to some extent, this gain was the result of rationalization in the forest industry, which means that BC’s turnaround in this critical indicator was linked to the loss of many jobs in a vulnerable sector, rather than increased investment in machinery and equipment and human capital.

Labour productivity rests not only on capital investment, but also the quality of the labour force itself. BC’s labour force educational attainment is still lower (63.1%) when compared to Alberta, Ontario, and Canada as a whole (64.3%, 68%, and 66.4% respectively); it also grew slowly during the past five years (3.8% compared to the national average growth rate of 4.7%). And employment in the sciences declined in 2009, by 0.6 ppt, as layoffs occurred across many sectors where these skills are needed.

This lack of productivity helps explain why BC has the highest child poverty rate in the country, and some of the worst real wages of any province. Indeed, the effects are quite staggering:

In 2009, BC’s real hourly wage was $23.89, compared to $27.24 in Alberta, and $24.48 in Ontario. Labour compensation per worker was even more skewed, at $44,568 in BC, compared to $64,516 in Alberta and $48,612 across Canada. Finally, the female/male wage ratio in BC is lower than it was five years ago (from 0.87 in 2004 to 0.84 in 2009), in stark contrast to all other comparison jurisdictions, where it has generally risen.

The only question remaining is this: After a decade of massive tax cuts for businesses, what have they done with all that money?

The Neo-Liberal Agenda in BC: Reduce, Just Don't Shift

Aside from shifting taxation from the business sector to the middle class (like in the HST), the neo-liberal agenda seeks to reduce the overall size of government, particularly in relation to GDP. A classic example of this reduction in government can be found right here in BC. Below is a chart from the BC government's 2010 budget document called the "2010 Financial and Economic Review". [Please double-click on the chart to see the full scale view. The yellow highlighting indicates the NDP years in between the Socreds and the Liberals.]

We can see that, in the second-to-last column, spending has gone down significantly - relative to our overall capacity to pay. The poor economy and the Olympics have changed that recently, but the overall policy trend of the BC Liberals is clear. It may not seem significant, but each percentage point of GDP translates into hundreds of millions of dollars, dollars which disproportionally affect the population in the bottom half of the income scale because a much greater percentage of its income relies on government transfers and services.

This kind of economic analysis also explains why the government can claim it is spending more on services like education and health - in absolute terms and relative to previous years - but it also shows why the growth of our economy has exceeded our government's provision of services. And it further explains why claims that health care care spending is "out of control" is a myth. Spending is going up, for sure, but it's not out of control - except when tax cuts dramatically reduce a government's revenue and, relative to that, health takes a much bigger proportion. But, if that's the case, the story should not be health care, but our government's determination to return us to the 19th century, and to take us back to a social Darwinist, I'm-all-right-Jack society.

Recognition of a Keynesian Moment

I rarely take a lead editorial from the Vancouver Sun seriously. This Canwest/Postmedia corporate entity is at the center of right-wing propaganda in BC, and is representative of the very conservative outlook from Canada's media generally.

Nevertheless, today's editorial provides a sobering analysis of the American economy and its implications for Canada. It's also a clear (though unstated) reminder that Keynesian economic theory still matters. The editorial admits that the gathering storm clouds of a double-dip American recession are a matter of demand - or lack thereof. There is no supply-side monetarism in the newspaper's argument, primarily because near-zero interest rates have not overcome the massive debts that spring from a consumer society which is also stunningly unequal.

The Vancouver Sun decries the growing evidence of deflation, which is caused by "a drop in aggregate demand. That is clearly the case in the U.S., where consumers have simply stopped spending". And the culprits are not interest rates or its neo-liberal brethren, tax rates. At the center of the problem is a demand-side drop in the expectation of profit: "the drop in demand for goods and services means business has little reason to invest, expand and create jobs". In other words, in a society where the majority of the GDP is controlled by consumers, businesses will not invest in goods, services or productivity enhancements if there is no expectation that consumers will buy these goods and services. Paying less tax is irrelevant if there is no taxable profit.

Keynes, anyone?

More on the neo-liberal agenda

One of the truisms of neo-classical economics is that tax cuts for those already wealthy and powerful will “trickle down” to the middle and lower class. In other words, making rich people richer will eventually make everyone richer.

One of the most popular versions of this theory is the corporate income tax cut, which supposedly induces corporations to invest in machinery and its labour force, and thereby boost its productivity for the benefit of all. Admonitions abound that “[b]usiness taxes have a substantial impact on economic growth and productivity in terms of foregone revenue”. Thus, in 2000, the C.D. Howe Institute grudgingly approved the federal Liberal plans to decrease the “general federal corporate income tax from 28 percent to 21 percent over five years”, but noted that it wasn’t enough: “[T]he reforms are neither significant enough nor are they to be implemented quickly enough to make Canada’s business tax system truly competitive with the systems in many other industrialized countries or to create significantly better conditions for investment in Canada.”

The general rate is now 19%, with calls aplenty for further reductions of both federal and provincial corporate taxes. The problem, however, is that 10 years later and with the federal corporate tax rate cut by a third, Canadian productivity hasn’t improved. According to a June 3, 2010, report from that paragon of Bay Street, TD Bank,

the alarming reality is that labour productivity growth in Canada’s business sector has been in structural decline since the 1970s. Even more concerning is that since 2000, labour productivity growth has slowed to a crawl. The scope of this trend has not been mirrored by other developed countries, and it is taking a toll on Canada’s international economic clout. Between 1990 and 2008, Canada’s GDP per capita slipped from 5th to 11th among OECD countries.

The report clearly lays the blame on Canadian companies, which are “failing to innovate and find better ways to employ their existing resources”. The situation puzzles the report’s authors, since “taxation policy has become dramatically more favourable towards capital investment”. In the end, the TD report admits it doesn’t have all the answers. Indeed, the “answers to many of the questions surrounding Canada’s productivity woes are awaiting discovery, but an aggressive and substantial research effort will be necessary to uncover them”.

So the self-serving truism isn’t true at all. Corporate income tax cuts may serve to amplify corporate profits and shareholder dividends, boost mergers and acquisitions, and increase CEO bonuses. But they don’t improve productivity and competition, and they don’t improve employment in the “goods-producing sectors” that should benefit most from productive investments.

Of course, what corporate tax cuts do is reduce the contributions of the business sector to government coffers, and increase the revenue burden on working-class and middle-class citizens. And this is the core of the neo-liberal agenda: attack progressive taxation, and redistribute the burden of taxation from the wealthy to the middle and lower classes. If you're good at it, you'll convince the hoi polloi that it's good for them - wealth will trickle down, after all - or you get them to willingly accept a much smaller government - I'm happier accepting less because that's what makes the wealthy happy.

One of the most blatant examples of that is right here in BC. In the September update for the 2009 budget, the provincial Liberals bragged about the following:

In 2008, the small business corporate income tax rate was reduced from 4.5 per cent to 2.5 per cent — a reduction of 44 per cent. The government intends to reduce the rate to zero by April 1, 2012. B.C.’s general corporate income tax rate has been reduced from 16.5 per cent to 11 per cent, with further reductions to 10.5 per cent planned for 2010 and to 10 per cent in 2011.

So how do we pay for this reduction in revenue? One way is to institute an HST tax that eliminates "retail sales taxes on business inputs and capital goods such as machinery and equipment, and reduce[s] the rate of taxation on new investment". Doing this redistributes the sales tax burden from the business sector to the consumer sector. (For more, see my September 2nd discussion of BC's HST below.) Another way is to increase user-pay fees... even more. Instead of spreading the costs of certain social services across the tax-base and across time, the user is expected to pay more and more and up-front for specific services. For example, in another document from the same budget update, we see an inevitable but rather shocking result – in 2011/2012, the BC government is expecting to receive more revenue from post-secondary tuition than from corporate income tax. According to government revenue projections, BC corporate income tax revenue will be $1,038,000,000 while post-secondary education fees will earn the BC government $1,114,000,000 (see p. 144).

Thus, on behalf of benefits that don’t exist, more people will be forced into larger and larger debt loads, or will forego user-pay services - like university - altogether. Politics is about choice, and it’s clear what choice our current provincial government has made.