In the middle of the worst downturn since the Great Depression, with unemployment projected to remain at elevated levels for most of the next decade, we have the bizarre spectacle of a presidential commission on the deficit. The commission is supposed to issue a report to Congress by the end of the year on how to get the long-term deficit under control.
This commission contains more than a bit of the theater of the absurd. At the moment, the only force sustaining the economy and keeping unemployment from rising further is the large deficit being run by the government. If we snapped our fingers and eliminated the deficit tomorrow, we would see the unemployment rate rise well into the double digits. The deficit creates demand in the economy. It is really simple; if the government spends more money, then it will employ more people. If we cut back this support for the economy, fewer people would be employed.
But Washington politicians have trouble saying what is obviously true. So, instead of talking about putting 15 million people back to work, we are talking about curbing the deficit. This would be like creating a commission on water conservation as we struggle to get enough water to quench a fire threatening the capital. But that's where politics in the United States is right now.
The deficit commission's co-chairs, former Wyoming Sen. Alan Simpson and Erskine Bowles, a former chief of staff to President Clinton, insist that everything is on the table. In particular, they have both touted their willingness to support cuts in Social Security. It is always impressive to see wealthy and well-connected people who have the courage to take away benefits for which middle-income people have worked and paid.
As the Social Security trustees report shows, Social Security benefits will be fully funded by its designated tax through 2037. The Congressional Budget Office projects that the payroll taxes will be sufficient to pay full benefits through 2044. So, when Simpson and Bowles say that they are anxious to cut workers' Social Security benefits, they are pledging to take away benefits that these workers have already paid for with their taxes. These guys probably rip off employees on their wages too.
If Simpson and Bowles really gave a damn about the deficit, they would look to where the money is and support a tax on financial speculation. A modest set of financial transactions could easily raise more than $100 billion a year. A modest tax on trades (e.g. 0.5 percent on stock trades and 0.02 percent on trades of futures and credit default swaps) would have almost no impact on ordinary investors. In fact, such taxes would just raise transactions costs back to where they were in the late 80s or early 90s, years when the United States certainly had a vibrant capital market. However, even these modest taxes would impose substantial costs on traders who are actively speculating in these markets, and they could raise lots of money.
The United Kingdom raises the equivalent of $40 billion a year in the United States by just taxing stock trades. Applying the tax to trades of futures, options, credit default swaps, and other derivative instruments traded by banks would substantially increase this amount.
The opponents of this tax insist that it will not raise much revenue and that it is not possible to do without an international agreement. These objections are just excuses to protect Wall Street. The experience of the UK shows that the claims are not true (i.e. lies). The UK shows that it is possible to have the tax in one country and that it can raise plenty of revenue. When people tell us otherwise, we should just tell them to go collect their paycheck from Goldman Sachs and stop bothering us with nonsense.
So, when the deficit commission issues its report, if it comes with a recommendation to cut Social Security and without a recommendation for a FTT, we know what to do with it. Such a report would be worth as much as one of Lehman's Repo 105's or a credit default swap from AIG. Congress should send this deficit commission report back to Wall Street and tell them where to put it.