American government – Straight Story

U.S. progressives call for higher corporate and personal taxes. Conservatives want no tax increases. Given that the Biden “green” plan at its core requires a robust American manufacturing sector, we need a more nuanced tax scenario.

The Biden campaign proposal to increase the nation’s corporate tax rate to 28 percent would leave that rate below pre-Trump corporate tax levels but still put the United States above most European rates and leave American manufacturing at a competitive disadvantage.

Would federal policies that mandate the purchase of U.S.- made products offset this disadvantage? Mandates work mainly for subsidized activities. These tend to involve insider contracts rather than promote entrepreneurship. Germany has become an international manufacturing powerhouse — with large foreign exchange surpluses but industrial wage and benefit levels nearly double what U.S. corporations provide — without such mandates. Germany has a corporate tax rate of 15 percent, plus a 5 percent “solidarity” assessment.

On personal taxes we have counterintuitive reasons for increasing progressivity in personal income taxes beyond Biden’s 39.6 percent. The first reason looks back to the 1970s when the United States suffered disproportionate deindustrialization. We hemorrhaged products and industries where we had traditionally excelled. Other European nations didn’t abandon traditional and new industries. Finland produces those beautiful cruise liners. Italy retains its shoe and clothing industries and leads in popular granite table tops and other stoneware. Sweden’s IKEA is the world’s leading home furnishings company, and Volvo ranks as the second biggest truck maker after Daimler. Sweden also shares with Denmark the distinction of having the world’s highest personal tax rates on high incomes. In the United States, we have one of the lowest.

The subsequent Reagan administration’s relegitimization of business may have been timely. But the Reagan reduction of top personal taxes from 70 to 28 percent led to executive pay becoming linked to corporate profits. This stimulated exponential increases in executive compensation (as well as lawyers’ and others’ pay) , and those increases, in turn, encouraged corporate executives to pursue short-term profits over long-term goals.

No U.S. top executive pursued short-term profits with more zest and celebrity than General Electric’s CEO, Jack Welch, who would retire in 2001 with a record severance of $457 million. The culture Welch installed at GE created bubble growth and an ultimate crash for the historic manufacturing company.

In 2014 GE contracted to sell the last major U.S. suite of household appliances — its appliance division — to Sweden’s Electrolux, a move designed to gain cash for more profitable investments. Such investments earlier included high-finance and real estate ventures that brought GE profits along with a deemphasis on making products and meeting U.S. technological needs. GE’s German counterpart, Siemens, took a different course. It continued its traditional long-term strategies and today rates as a major global player across the technological spectrum, as well as a key partner in Germany’s proactive climate-change policies.

The learning I take from all this: America’s astoundingly high top incomes have a negative effect on our national productivity. Nor do top earners stimulate productivity. They buy expensive real estate like Bill Gates’ $147 million primary residence. They purchase foreign properties and luxury goods, art objects and Lear Jets, expensive security and financial services. They invest for personal income security and growth, but as Jack Welch demonstrated, investments for the highest possible returns do not necessarily serve national needs.

The incomes of our top earners have an additional negative impact. They grow our nation’s unsupportable inequality. Among advanced nations, we have the greatest disparity between rich and poor. Before 1970 the lowest income quintiles in the United States saw the fastest growth. In a post-war America where top-bracket personal tax rates never dipped below 70 percent, blue-collar breadwinners could support families on one income. Since 1970 incomes in our lowest quintile income have remained nearly flat in inflation-adjusted terms, with our bottom 50 percent owning a mere 1 percent of the nation’s wealth. Older families, the St. Louis Federal Reserve Bank reports, have 12 times the wealth of younger families.

These extremes have triggered record public support for more radical political policies, with disaffection concentrated among younger voters. We will have no economic and political stability in the United States until we correct these imbalances.

The “Gilded Age” from 1870 to ~1890 was a time of rampant public and private corruption. Congressional seats could be bought and sold. “Robber Barons” made giant killings through monopolies and manipulation – and brought on devastating panics.

The signposts are all around us that ethics in government and society have deteriorated. In recent years record increases in the proportion of national income going to the ultra rich (Fig.1), appointment of partisan political loyalists rather than competent officials to high level agencies, the rising influence of money on elections and politics, and flagrant public and private lapses in ethics have caused a number of economists and historians to refer to U.S. society as having gone into a “New Gilded Age”. Many citizens are angry and looking for change. How can such change come about?

My recent research comparing developments in the old Gilded Age with the New Gilded Age (1) shows that reform was out of reach as long as the public accepted the extravagant promises and favorable treatment they got from politicians. A turnaround became possible only after a wave of revulsion on the part of the public over events in the early 1870s (Grant administration) allowed real reformers to be elected to high public office. This process began with the election of 1877, but it took two decades to bring about clean, competent governmental agencies and even-handed executive actions (Theodore Roosecelt) that gained widespread public trust.

Postscript: Since this essay was last edited in January 2014, evidences of public dissatisfaction and anger in both parties have emerged in terms of the 2016 Primary election campaign. This may be be a precursor to real reform.

POLITICAL HISTORY

Experts agree that the founders of the United States represented a flowering of political talent and statesmanship that forged a new government system designed to anticipate human fallibilities affecting democracies. Historians have suggested that the writing of the Constitution was aided by the fact that while American colonists inherited Enlightenment ideas from Great Britain, they were largely self-governing and free from the deep corruption that characterized politics in the mother country (until the middle of the 19^th Century).

The first six presidents maintained George Washington’s policies of basing appointments of federal employees on competence. President Andrew Jackson broke with this tradition. His administration (1829-1837) introduced the “spoils system” that led to turnover in government appointments in subsequent administrations.

Public and private corruption peaked in the administration of Ulysses S. Grant (1869-1877). It marked the beginning of a “Gilded Age” of unprecedented veniality after the Civil War. An example is the Salary Grab Act of 1872. It doubled President Grant’s salary to today’s equivalent of $900,000/year, and awarded each Congressman a one-time bonus equivalent to $90,000 in today’s dollars. Public outrage forced its repeal and helped support the rise of reform candidates in the subsequent presidential election. President Rutherford B. Hayes (1877-1881) committed himself to a single term in order to focus on reform of the federal government. Subsequent reforms culminated in the administration of Theodore Roosevelt (1901-1909). They brought about a system of efficient government operation with independent federal agencies that operated largely free of arbitrary interference.

Stresses on federal government operations after World War II included growing environmental concerns, the assassination of President Kennedy in 1963, and other developments. An environmental crisis triggered by the Santa Barbara offshore oil spill of 1969 caused Congress, in effect, to take over responsibility for environmental management from federal and state professional agencies through unprecedentedly detailed laws. Rigorous centralized intervention in basic economic activities and expanded roles for federal courts politicized environmental policy. The Democratic Party became the party of environment, and the Republican Party became the party of industry. Both parties reintroduced patronage systems with turnover in federal agency administrations after elections.

RECENT “GILDING” TRENDS

Income disparities. Economic researchers Thomas Piketty and Emmanuel Saez have shown that the share of U.S. national income received by the top 10% bracket reached 50% in 2007, values last seen in 1927.

Role of money in elections. A recent CNN report showed the average cost of Congressional campaigns increased from $360,000 in 1986 to $1.6 million in 2013 for a seat in the House of Representatives. The Supreme Court’s “Citizens United” decision in 2010 lifted restrictions on political contributions by independent corporations, associations, and labor unions.

Interest groups dominate policymaking. Over the past 40 years decisionmaking by Congress and official agencies in the U.S. has been increasingly influenced by partisan politics and diverse interest groups ranging from drug companies and gun lobbies, to environmentalists and trial lawyers. Special interest policies are promoted by lobbyists whose aggregate payments were recently estimated at $3.2 billion per year, by litigation, mass mobilization for campaigns, and cultivation of influential officials. The system has led to flawed decisionmaking and conflict, including Congressional gridlock. Courts and judges have increasingly come to decide issues outside their intended roles, and where they have no professional expertise.

Federal and state governments increasingly ignore the spirit or letter of laws. For decades the IRS has required payment of taxes on gambling winnings by individuals in states where gambling was illegal. To maximize compliance it pursued a de facto policy of not disclosing information on these payments to states. States, in turn, received taxes from illegal immigrants, turning a blind eye to their status and avoiding disclosure of information to the Immigration and Naturalization Service. Twelve states have passed laws legitimizing marijuana that directly violate federal law.

Presidents get around laws. Besides the Watergate scandal that led to Richard Nixon’s resignation in 1974, Democratic and Republican presidents have increasingly pursued policies in conflict with the spirit or letter of the law. In a retrospective essay ardent environmentalist Jimmy Carter reported that as President he asked his Secretary of the Interior, Cecil Andrus, to find ways to sequester Alaskan land. He then used the obscure American Antiquities Act of 1906, originally designed for parcels like the Statue of Liberty, to protect 60 million acres of federal land in Alaska from economic use through designations as “National Monuments”. The Act specifies that parcels “in all cases shall be confined to the smallest area compatible with proper care and management of the objects to be protected”. Carter acknowledged that Ronald Reagan was furious about his action, regarding it as a “land grab”.

After Carter’s defeat in the 1980 election, Reagan appointees sought to roll back the tide of environmental regulations and sequestration of federal land by slashing enforcement budgets and curtailing (mandated) enforcement of 1970s environmental laws by the Environmental Protection agency. When opposition at hearings got in the way of implementing expansive new leasing policies, Secretary of Interior James Watt simply stopped holding hearings.

President George W. Bush set new records for “signing statements”, i.e. signing Congressional laws with reservations signaling that he did not intend to abide fully by the laws’ provisions. The White House and other federal agencies tried to influence or inhibit science and regulatory agency reports, actions that were formally censured by the Comptroller of the United States and Interior’s Inspector General.

With support from his Attorney General, President Obama declared that he regarded the Defense of Marriage Act (DOMA) unconstitutional, and therefore would not enforce it. Regardless of the merits of this view, no such discretion is given to the President by the Constitution. Arbitrary interpretations or circumvention of drug and immigration laws have followed.

Financial scandals. In the early 1990s bad judgment and fraud closed 747 of the nation’s 3200 savings and loan banks. In 2003 a multiagency settlement implicated ten of the nation’s largest investment firms in wrongdoing. Prolonged, unprecedented lapses in financial and ethical judgment on the part of the nation’s private and public economic and financial leaders led to the financial crash of 2008 and the worst recession since the great depression of the 1930s. The semi-public lending institutions, Fannie Mae and Freddie Mac were involved in the fiscal meltdown. Notwithstanding tightened controls since 2008, a record fine of $2.6 billion for deceptive practices was recently levied against the iconic J.P. Morgan Chase bank.

Breakdown of moral and ethical standards. The above actions are signs of erosion of a sense of community that remained strong in the U.S. for a time after World War II. Over the past 30 years behaviors of previously unthinkable kinds, like wanton killing of innocent students and school children have increased. Government employees without ties to foreign governments have taken it upon themselves to release vast amounts of classified and highly sensitive documents in response to perceived governmental abuses.

HISTORY’S INSIGHTS FOR FUTURE REFORM

The U.S. is showing increasing disillusionment with political institutions. Experience from the earlier reform period suggests that meaningful restructuring of government must be comprehensive. Government is now vastly larger than in the past and the serious reform may seem unlikely. However, we can gain insights on pathways to reform if and when it comes, from earlier history.

How earlier change came about. Reform after 1877 took place through committed political leaders and influential citizens. Reform measures often met resistance, including that of the public, which liked aspects of the patronage system. As reformer Carl Schurz observed, the public often created barriers to meaningful change. Serendipitous events were often keys to creating changes in opinion favorable to action. For example, the assassination of President Garfield by a disgruntled office seeker ultimately aroused the public and Congress to pass the monumental Civil Service (Pendleton) Act of 1882. Reform leaders generally prepared reform measures with balance so that once enacted they would be effective and gain support by the public and politicians.

Predictions about the future of reform. We should not expect governmental reforms from a Congress that is unable to reform its own operations. Academic researchers on government and policy have become dispersed in fragmented disciplines that study real-world politics from a safe distance and whose publications are not used by decision makers. Nor should we expect reform from popular movements. These, like Occupy Wall Street, and The Tea Party can register disapproval or demand specific actions, but are unlikely to have the in-depth knowledge and balance to produce effective policies. Moreover, Gallup polls in 2013 showed that while voters gave Congress as an institution all-time low approval ratings – approaching 10%, 60% of voters liked their own Congressman. This kind of relationship was already described in the 1830s by the famous French observer of U.S. society, Alexis De Tocqueville. He noted in his book, Democracy in America, that the surprising lack of vision in U.S. politicians could be explained by the fact that voters were often poorly informed and preferred politicians who served their immediate purposes and told them what they wanted to hear. If history is a guide, urgency about improving governmental operations must reach a point where genuine reformers can gain influence and be preferred over the charisma or ideological appeal of alternative candidates for high office. We may need deeper crises in order to reach that point.