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Cheater Economics

by Brent Blackwelder

Cheaters are lurking in the U.S. economy, corrupting what should be an honest game of production, commerce, and trade. “Cheater economics” refers to the corporate welfare system in which corporations are given special tax subsidies and granted access to loopholes for avoiding tax payments. Cheater economics drains away needed tax revenues, leaving governments with the lose-lose choice of running up deficits or reducing services, or both. Often this means cutbacks in environmental, health, and safety protections. Thanks in no small part to the cheaters, the debate on public finance in the United States has shifted to deficits and the need for cuts. To those seeking funds for worthwhile programs, the answer is, “Sorry, we’re broke!”

We must reframe the debate if we wish to eliminate corporate abuses and get serious about establishing a sustainable, steady state economy. And we should start by getting rid of the cheaters.

Some examples of cheater economics are blatant, such as welfare handouts to polluters. It’s bad enough that corporations are allowed to externalize the high costs of their polluting activities, but what’s worse is that taxpayer funds flow to dirty industries (e.g., oil and nuclear reactor companies) in the form of direct handouts and tax loopholes.

Other examples of cheater economics, however, are more subtle. One of the less well-known rip-offs, which benefits the top 1% of income earners, is a taxpayer subsidy for short-term speculation in derivatives. Traders, who can buy and sell complex derivatives in a matter of minutes, are allowed to claim a large portion of the resulting income not as a short-term capital gain, but as a long-term gain (which is taxed at a lower rate). Fortunately, the Senate is looking into this rip-off, and Senator Carl Levin (Democrat-Michigan) has introduced legislation to shut it down.

Republicans and Democrats alike have helped set the stage for cheater economics through financial deregulation. Today’s Republican leadership continues to push for deregulation, but prominent Democrats, going back to President Clinton’s Treasury Secretary Robert Rubin, have also been prime drivers of financial deregulation.

President Obama won the election in 2008 just as the financial system collapsed in response to the deregulatory extravaganza promoted by both Republicans and Democrats. Those that destroyed the financial regulatory framework by repealing effective laws, such as the Glass-Steagall Act of the 1930s, brought on the devastating subprime collapse.

But Obama, as a new President with tremendous support, failed to seize the initiative in 2009. Instead the aggressive right wing brilliantly framed the debate over the size of government, the tax code, and unemployment. Thus the Republican leadership established a strong message in favor of: 1) cutting government spending as the way to deal with the deficit, 2) abolishing EPA’s environmental regulations as the way to relieve unemployment, and 3) maintaining low taxes on the wealthiest 1%, because raising taxes is never the solution.

And now there’s another looming setback to efforts aimed at reining in the cheaters. The IRS, the tax collection arm of government, is being cut, which will seriously limit the agency’s reach when it comes to tracking tax dodgers and overseeing the collection of legitimate tax payments.

The election year offers a prime opportunity to push back against cheater economics by reframing the debate. Let’s start asking who is hijacking the revenue. We are not broke. Simply closing the numerous tax loopholes would bring in more than the $1.2 trillion the Republican leadership has been demanding in budget cuts over the next decade.

Annie Leonard, the creator of the popular Story of Stuff video, is leading the charge to reframe the debate. Her new video, The Story of Broke, calls for a shift in government spending to invest in renewable energy and other industries that can provide jobs and a healthy environment. Another movie, We’re not Broke, is also helping to change the message. This new film, backed by the Tax Justice Network, tells the story of how corporations are dodging taxes and how seven fed-up citizens are working to make the corporations pay their fair share.

Another way to reframe the debate is to showcase the benefits of environmental regulations. A review of the scientific literature on the causes of job loss shows that environmental compliance costs are small. Only among a handful of the big polluting industries are the costs greater than 2%. Furthermore, the health benefits of environmental regulation are enormous.

The U.S. Bureau of Labor Statistics notes that safety and environmental regulations are responsible for only 0.1% of job losses. Frank Ackerman’s Poisoned for Pennies provides more details on this story. Despite the facts, various Presidential candidates and the Congressional Republican leadership persist in attributing the loss of jobs to environmental regulations and call for the elimination of the EPA.

So the question to both Republican and Democratic candidates this year should not be, “What are you going to cut or deregulate?” The question should be, “Why aren’t you getting rid of cheater economics?” Now is the time to demand the honest economy we all deserve.

Economics for the Story of Stuff

Annie Leonard’s The Story of Stuff, the explosive online video (now also expanded into a book), provides an entertaining explanation of a glaring economic flaw.  The Story of Stuff takes a look at the economy’s linear system that runs from extraction to production to distribution to consumption to disposal. As Annie says, “… you cannot run a linear system on a finite planet indefinitely.” You especially can’t grow the size of that linear system indefinitely. But that’s the misguided aim of current economic goals and policies. Misguided as it is, however, we know why politicians and economists push economic growth and consumer spending. As soon as we slow down our shopping and buy less stuff, the economy spirals into a recession. That’s when we start hearing about and experiencing real problems – problems like people losing their jobs, their homes, and even their ability to take care of basic needs.

What a dilemma! The planet can’t sustain our pattern of consumption, but people get steamrolled in the economy when consumption slows down. The solution is to figure out how to structure the economy so that people can meet their needs without trashing the planet. But restructuring the economy is no simple task. Even gathering the will to take a shot at it is difficult.

The main reason is that economics is a subject most of us avoid. The majority of people understand that it’s good to have money in their pockets, but they don’t necessarily want to get involved in the policies of the Federal Reserve, the inner workings of the Treasury Department, or banking regulations. That’s the job of economists, right? But 99% of economists are entrenched in the old way of thinking. Their training and their methods are aimed at growing the unsustainable linear system. Economists are always talking about growth. Growth, growth, growth. They seem to believe that getting bigger is the only recipe for getting better. It’s worked for them in the past and it’s what they know. And they mostly haven’t studied ecology or physics or other fields that would help inform them about the effects of their policies on the planet.

As a result, economists are doing what they can to prop up the old system, and politicians and the public are inclined to listen to them. Politicians are especially susceptible to the spin. They don’t usually know much at all about economics, but they do know they’ll be thrown out of office if people are losing their jobs and their sense of security.

Why do we grant so much latitude to economists, especially when they have proven time and time again that they can’t predict momentous economic events? With few exceptions, they didn’t know the financial and economic crisis of 2008 was coming. We’ve pursued and achieved economic growth for several centuries, and through official policy for over 50 years. If their prescription of continuous economic growth is the answer, why are we facing so many profound environmental and economic problems? Why should we be worried about global warming and losing our jobs at the same time?

It will take a lot of effort to get the ball rolling on changing our economic structure. On the positive side, ecological economists have already developed the foundation for a new economy. A steady state economy provides a real potential for sustainability that simply cannot derive from continuous pursuit of economic growth. A steady state economy respects limits and strives for stability in population, consumption, and overall use of energy and materials. To get a feel for how this works, think of a healthy mature forest. It does not grow in size, but it is a living system with a complex web of parts. Remarkably diverse groups of species cooperate and compete within the forest, and there are opportunities for new species and ecosystem functions to develop over time.

Just like in the forest, stability in a steady state economy is very different from stagnation. Ecological economists actually call this kind of stability a dynamic equilibrium. This fancy term simply means that a steady state economy is dynamic – it changes and develops over time – but it balances with the natural environment. The idea is to right-size the economy, to find that Goldilocks size that’s not too small and not too big, but just right.

The old economy has one major rule: grow or die. Unfortunately, we’re getting to the point where that rule is changing to grow AND die. In contrast, the new steady state economy lives by four main rules described below. It’s very hard to argue against any of these four rules. In fact, as a test, let’s consider the opposite of each rule as well…

Rule 1 – Maintain healthy ecosystems. Healthy ecosystems provide the life-support services for the planet. Ecosystems tend to be resilient, so they can handle quite a bit of disturbance. But if economic activities grow too large, they can disrupt the ability of those ecosystems to do their job.

The opposite of Rule 1 is that we destroy healthy ecosystems or maintain unhealthy ecosystems, clearly not a good idea (assuming we want to maintain life on the planet).

Rule 2 – Extract renewable resources at a rate no faster than they can be regenerated. Renewable resources, like forests and stocks of fish, provide goods for the economy. The amazing part about them is that they can go on providing goods year after year, so long as we don’t overdo it. If we take only the number of trees and fish that can be regenerated (economists call this sustainable yield), we can keep consuming timber and fish for generations to come.

The opposite of Rule 2 is that we extract renewable resources at a rate faster than they can be regenerated. Following such a course of action would wipe out the forest and drive the fish population to extinction. It would be like killing the goose that lays golden eggs.

Rule 3 – Use non-renewable resources at a rate no faster than we can find renewable substitutes. To use a non-renewable resource, like a fossil fuel or mineral, really means to use it up. There will be less of it available for future generations. This condition doesn’t mean that we have to leave all non-renewable resources untouched. But it does mean that there is a clear limit to their exploitation, and we should be working toward replacing them with renewable substitutes as we use them up.

The opposite of Rule 3 is to use non-renewable resources without finding renewable substitutes.

Following this course of action would deplete the bounty of planetary resources in short order. It would be like winning a million dollar lottery, leaving behind a job, and throwing a million dollars’ worth of lavish parties for one year. It might have been one heck of a year, but at the end of it, the money would be all gone, and future prospects wouldn’t be so bright.

Rule 4 – Dump wastes into the environment no faster than they can be safely assimilated. Depositing wastes faster than they can break down means that we have to live in our own piles of refuse. It makes for unpleasant and unhealthy living conditions.

The opposite of Rule 4 is to dump wastes as fast as we please. We don’t have to imagine the consequences of this course of action. We’ve seen them in the past – remember when it wasn’t all that uncommon for a river to catch on fire? And we see them today in the form of climate change and rising cancer rates.

Before we can go about building an economy based on these rules, we need to tell our economists and politicians that enough is enough (signing the CASSE position is a good start). We need to stop avoiding the thorny subject of economics and demand a new economic framework — preferably a steady state economy that provides a happy ending to The Story of Stuff.