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Criticisms of the President’s plan distract us from the real issue

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Unveiling the second part of his $3 trillion deficit reduction plan on Monday, President Obama stressed, in no uncertain terms, that he would veto any bill that would call for cuts to Medicare without raising new revenue. According to the President, “I will not support any plan that puts all the burden for closing our deficit on ordinary Americans”. The deficit plan called for $1.5 trillion in new taxes and immediately elicited criticism from Republicans who accused the President of engaging in class warfare.

America does have a history of class warfare, and it’s a turbulent one.

The most salient example are the Great Railroad Strikes of 1877 when wage cuts, dangerous working conditions, and distrust of industry leaders erupted into violent confrontations between management and labor. Strikes occurred all over the country killing over a hundred people. The most extreme case occurred in Pittsburgh when fires erupted setting the city ablaze. There are other examples such as the bombing of theĀ Los AngelesĀ Times building which occurred in 1910 over its anti-union policies. Then there was the Ludlow Massacre of 1914, when the National Guard attacked a compound of striking miners and their families killing around twenty people.

These are America’s stories of class warfare, and represent the very real, and very violent, clashes that manifest under a growing divide between the side of capital and of labor. It’s an egregious mischaracterization to equate the elimination of tax deductions for the wealthy with the cases mentioned above. In no way does the President’s proposal continue an oppressive history disenfranchising the working class. In fact, the charge of class warfare distracts us from the real issue of today – the yawning divide between the rich and the middle class. Below is a graphic from the Center on Budget and Policy Priorities which illustrates that rift.

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The U.S. middle class has been stretched thin over the past couple of decades. The median income has remained stagnant for the past thirty years as much of America’s wealth continues to concentrate up at the top. In fact, the UN has reported that before the recession of 2008, the United States had the highest level of income inequality among all highly industrialized countries. Despite the upward flow of capital, top income brackets have actually been paying increasingly less in taxes. Below is a chart from the Tax Policy Center illustrating the falling tax rates over time. Note that under the President’s proposal, top income earners will still be paying far less than they were under Reagan and Nixon.

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In the President’s words, “This is not class warfare, it’s math”.

However, not all of the plan’s critics are crying ‘class warfare.’ On another front, many argue that raising taxes on top income brackets would disincentivize job creators from hiring and, in turn, stymie growth in the economy. This may seem right in theory, but it’s a specious argument as our current economy demonstrates that business profitability does not necessarily lead to more jobs. As many have pointed out, job creation has flat-lined despite that fact that corporations are sitting on record profits. As it turns out, those at the top income brackets are not the “job creators” we have expected them to be.

Furthermore, there is nothing to suggest that high marginal tax rates for top income earners would encumber the economy. Again, the chart from the Tax Policy Center shows that the top marginal tax rates soared between 70% to 90% three decades following World War II, a period marked by an expanding middle class, climbing GDP, and over all economic prosperity. The U.S. economy grew more during that period than any other since. This is not to say that higher tax rates caused the prosperity, but it does refute the old canard that high tax rates on the wealthy inevitably hurts the economy.

Now what happens if we continue to lower tax rates for top income brackets? Lower income earners will have to pay a bigger burden. Many GOP candidates have suggest we do just this. Rick Perry, Mitt Romney, and Michelle Bachmann have all suggested that we ‘broaden the base’, which means extend the tax burden to more income brackets including the middle class and lower class. What would that do to the economy? Does anyone really think that raising taxes on middle class families during a recession is a good idea?

After all is said and done, the American people support raising taxes on the wealthy. Below is a Gallup poll measuring public opinion of President’s plan.

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Two-thirds of Americans support raising taxes on top income earners, and over two-thirds support eliminating tax deductions for corporations.

This is not a new debate. Liberals and conservatives have always disagreed over the role government should play in the economy. However, despite our pro-market culture, our history paints us as champions for the middle class. Government action protected laborers from harsh working conditions in factories. Anti-trust laws exposed questionable business practices and broke up monopolies to ensure competition in industry. The American economy is not one that ever enjoys complete absence of government. Many times the government has to get involved, and raising taxes on those who can afford it is a minimal measure. Republican leaders would do well to remember this because the more they decry the President’s plan, the more they isolate themselves from general will of the American middle class.

Workers anxious about job security amidst dismal jobs report

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Stocks plunged as the Bureau of Labor Statistics reported that no new jobs were created in August, holding the unemployment rate persistently at 9.1%. The latest BLS jobs report, the worst in almost a year, confirms fears of a stalling recovery. Also affecting the markets was the news of major banks, including Bank of America, Goldman Sachs, and J.P. Morgan Chase, facing federal lawsuits concerning the securities sold duing the housing bubble. Friday’s markets closed with the Dow down 253 points, 2.2%

The news of both tumbling markets and a grim employment outlook breaks just after Gallup reports on the rising fears of being laid off. Job insecurities are double what they were in 2008. What does this mean for our recovery?

Consumer spending accounts for 70% of the American economy, which is encumbered by a flat-lining unemployment rate now compounded by rising fears concerning job security. In turn, employers aren’t hiring until they see a rise of consumer spending. It’s a vicious cycle and unlikely to correct itself for some time.

Now, public opinion is an interesting thing, and this latest Gallup poll is not to be taken as a presage of imminent mass layoffs. In fact, after spiking in 2009, the number of layoffs dropped precipitously in 2010 and are still declining today. However, it’s possible that such worries could become self-fulfilling prophecies if workers cut spending in anticipation of a job loss or cut hours – and the vicious cycle continues.

What could shake the cycle is a well formulated stimulus plan injecting an aggressive amount of capital in the system, though this is unlikely given Washington’s recent move to austerity. Even if we see more stimulus in President Obama’s jobs plan next week, such a plan would be met with resistance by Republicans in the House. While Congress struggles to reach compromise on a plan, in the meantime, Corporate America may actually be in a position to ease the concerns of their workers.

For starters, Corporate America shouldn’t forget the reciprocal nature they have with their employees. Yes, those on the payroll are workers, but they’re also consumers. Yes, they cost money because you pay them, but they also spend that money on your products. In other words, creative employers need to incentivize workers to consume more of their products. How can they do this? They could start by raising the pay of their workers – not only do they need it, they deserve it. Below is a chart from the Bureau of Labor Statistics illustrating the growing gap between productivity and compensation.

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Hourly compensation hasn’t kept up with productivity. We have been producing more for cheap at the expense of our work force. Now would be a perfect time for Corporate America to play catch-up. In other words, while employers aren’t willing to invest in hiring new people, they could invest in the workers they already have. They can do this by promoting more workers to higher positions, raise salaries and hourly pay rates, increase bonuses by size and frequency, pay for more employee training programs, offer company discounts, etc. These measures could possibly mitigate some of the job related concerns felt by the workforce. Who should these measures target specifically? The middle class is the most worried. As the chart illustrates below, households earning $50,000 or less feel the most insecure about their positions.

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Do corporations have the capital to afford this? Yes! They have been sitting on record profits sparing costs for an uncertain future. That, however, is an unstable situation as record profits can’t be sustained without the economy’s primary component – consumer spending. So, if business leaders want to stay in the black, they’re going to have to invest in their workers.

Now, let’s be careful not to suffer from optimism bias. This kind of proactive approach for businesses is, by no means, a panacea; nothing can jump start the economy better than a well formulated stimulus bill. While it’s evident that the Recovery Act of 2009 did work, ‘stimulus’ has become a dirty word. The President should continue to fight for a jobs bill and hopefully the plan he unveils next week will be ambitious. However, after an acrimonious debate over the deficit, Washington seems unable to act decisively in a time of crisis. That said, we need to think of what can done from all fronts. The private sector has some role to play, and while business owners possess no silver bullet, employers can work to ease the insecurities of their workers. After all, their workers are consumers too.