Debt Revolt? Tax Strike?

There are a Lot of Angry People Out There

By MARSHALL AUERBACK

CounterPunch

No more free passes. A number of the President's supporters who expressed concerns about the pro-Wall Street tilt of his early administration decisions were prepared to give him the benefit of the doubt so long as he came through on health care. President Barack Obama's statement over the weekend that the public option for insurance coverage was "just a sliver" of the overall proposal, and the suggestion by Health and Human Services Secretary, Kathleen Sebelius, that a direct government role in a system intended to provide virtually universal coverage was "not the essential element", appear to provide conclusive evidence of this administration's capitulation to corporate interests. The "change you can believe in" President increasingly looks more like a Manchurian candidate of the right.

The disturbing thing about Obama taking the Rubinite path is that he now leaves government exposed as the lightening rod for everyone's problems, rather than the solution. If he had taken a more populist tack, more public anger could have been directed at the right people from the start as occurred under the FDR administration.

Extending the Bush/Paulson bailout policies (and, indeed, expanding them) and ignoring the needs of the productive economy, have largely discredited government fiscal activism. Obama no longer appears willing to let the fiscal position of the federal budget grow as needed to meet current challenges.
When one adds extreme income imbalances and a comparatively weak social safety net (in contrast to those supposedly horrible "socialists" in Europe), then one has the makings of major social unrest, manifesting itself most recently in health care town hall meetings across the country this August.

Growing social unrest is something we have warned about for months. It's not being taken seriously by Obama's people. The eruption over the AIG bonuses was the tip of the iceberg. The "experts" said it was "beside the point", but it wasn't. It was a basic issue of fairness that could be readily understood by the vast majority of Americans in a way that complex credit default swaps could not.

And the “experts”, who derided the eruption over AIG as a sign of irresponsible populism, are now being similarly dismissive of the town hall protests, which are themselves ostensibly being directed against a “government takeover of health care”, but in reality reflect so much more.

True, Obama has responded ineffectively to the absurd distortions of his plan (well, what we’ve seen of his ‘plan’ as he has delegated much of the writing of it to Congress). But when government is no longer perceived as an instrument serving the general good, one can understand the susceptibility to the gross distortion of today’s health care proposals, however irrational the complaints might appear to the “experts”. The protests more broadly represent a large, inchoate sense that the government is heading in a horribly wrong direction: At its most basic level, it looks increasingly as if the government is simply rewarding bad behavior, particularly given how the housing situation and banking bailout has been handled

In a recent piece I discussed debt repudiation as one manifestation of American citizens' growing sense of helplessness. Could tax non-compliance be far behind? Certainly, it is a possibility (although one I would certainly NOT advocate), given the underlying perception of unfairness in terms of how the taxpayers’ dollars are being deployed. Both debt repudiation and tax non-compliance come when citizens collectively come to the decision that the entire power structure has no legitimacy because it no longer serves the broader population's needs and interests. That’s the longer term possibility.

I am quite sympathetic to the "functional finance" view that there is no inherent "value" in money (not even gold), except insofar as one imparts a value to it via a commercial or private-public transaction. Indeed, the ultimate transaction in today's world is payment of taxes (you don't pay them, you go to jail). The sanction is so high because the entire legitimacy, indeed functioning of a state and its fiat currency depends on its citizens offering its labour in exchange for goods and services. Abba Lerner also suggested:

“The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.”

But the quid pro quo is that there must be tax compliance.

If debtors' revolt extends to tax non-compliance, then you've got the makings of a severe inflationary problem. Hyperinflations often occur when the government can print ever increasing quantities of money, but find little for sale, even as resources sit idle. The brief history of the Confederacy during the US civil war is an excellent illustration of this phenomenon. This does not require full employment; indeed, most hyperinflations take place with lots of unemployment because once hyperinflation sets in, it is virtually impossible to undertake 'money now for money later' operations..

The printing press, then, becomes a symptom of the problem, not the cause because it is the breakdown of the tax system which causes the government's fiat money to become worthless, not the running of the printing presses per se. Tax gives value to a fiat currency. When one has widespread tax avoidance, it marks the beginnings of true political dysfunction.

To be sure, we haven't come close to this point yet. But it becomes an increasing risk for an administration that seems determined to recreate the financial conditions that led to the disaster we are now experiencing. The Obama Administration risks destroying its legitimacy, as the rest of its political agenda is hijacked by a small group of wealthy plutocrats at the top. In the words of Yves Smith, “All Team Obama has done on the banking front is write a lot of blank checks, hold some bogus "stress tests" in lieu of doing the real thing, and raise a stink on a few symbolic issues to try to paper over the failure to embark on real and badly needed reforms.”

Similarly, having the drug industry enlisted in the negotiations to construct a health care plan (as reported in the NY Times last week) is akin to Dick Cheney using Enron executives to construct Bush's national energy policy.

It is almost as if Obama's pledge to not deal with lobbyists was never made.

His "teflon" is wearing off faster than a hot frying pan.

As Howard Dean notes, without a direct government role in health care, you cannot achieve real reform. Similarly, Professor James K. Galbraith notes that the intrinsic costs of providing public health insurance are considerably lower than those for private health insurance. As Galbraith writes in "The Predator State":

"There are no expensive inputs to purchase, not uncertainties of design or technology with which we have to concern ourselves. The major inputs are personnel and computing capacity. There are few major issues of innovation; unlike the rapid changes characteristic of medical practice, the service of providing insurance to pay for them does not evolve rapidly. A successful private insurance company follows an ancient formula: it stratifies its clientele by risk class and charges minimums adapted to each class. The most successful companies are generally those that manage to exclude the riskiest clients.

Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. "

Selective provision of private health insurance is invariably inferior to universal public provision. There are ample examples of successful, publicly supported (but privately administered) health care programs overseas in Europe and Asia. Yet, we appear to be heading in the opposite direction.

Given the inappropriate premises under which the Obama Administration has continued to operate (e.g. credit flows from the top down, rather than the bottom up, banks are suffering from illiquidity, not insolvency, we "can't afford" a public health insurance option), we should expect many of today's many problems to continue to languish. All of which will heavily constrain the capacity of the US economy to recover and may well lead to a Japanese style lost decade of economic stagnation.

Marshall Auerback is a market analyst and commentator. He is a brainstruster for the Franklin and Eleanor Roosevelt Intitute. He can be reached at MAuer1959@aol.com