Contrasting responses

Under backward capitalism, at times of crisis, the priorities of those who control the levers of political power have been regime survival and strong 'denial' of responsibility for causing, or for that matter contributing to the crisis. Very often this has meant denying the very existence of a crisis! It is not surprising, therefore, that more often then not the crisis would continue to intensify and eventually overrun the society bringing untold disaster, massive loss of livelihoods, and near-insurrectionist if not insurrectionist responses from the mass of the population to the economic and social distress enveloping them. In developed capitalist states the political priorities are rather more long-term. These priorities basically focus on survival of the capitalist order and the long-term integrity and stability of the state. These priorities, therefore, deliberately subordinate regime survival and put pressure on the political establishment to be reformist and pro-active when crises emerge.

Economics and national security

In that earlier discourse, I had also stressed the obvious fact that the crisis facing globalisation today embraces issues of both economics and national security. I attributed the latter set of issues to the post-September 11 responses of the Bush administration to the terrorist attacks and the subsequent elaboration of its own national security strategy for a 'new age' and a 'new enemy.' The build-up towards the invasion of Iraq is one aspect, therefore, of the security considerations to which I am alluding.

While these events converge with the economic slowdown which is the cause of so much concern, the slowdown had in fact started prior to the September 11, 2001 attacks. That the US economy, and for that matter the global economy, was in recession prior to September 11, 2001 is seen in the decline in growth rates. While the world economy had grown by 3.9 per cent in 2000, by 2001 it only grew by only 1.1 per cent. In the USA growth was even lower at 0.3 per cent.

This trend persisted in the US and global economy throughout 2002. Indeed it is now officially accepted that in the USA the recession started in March 2001. Of note, this recession occurred after a 10-year expansion beginning in March 1991. This expansion was an all-time record. It was so sustained that, by April 2000, the unemployment rate had fallen to 3.9 per cent - the lowest recorded in the USA in more than 30 years.

This was the period in which analysts proclaimed the arrival of a 'new economy.' That is, one in which 'recession and economic slowdown' had become relics of the past. This duped many investors who went blindly into investments in stock and financial markets, thereby generating the biggest financial boom of all time. Now we have become aware of the fraud, deception and theft that were taking place behind this facade, which as we know collapsed in the wake of the Enron scandals. One consequence of this collapse has been the identification of the stockmarket collapse with the USA recession. In practice this identification has been so strong that even though some analysts claim that the recession in the US came to an end in November last year, there are numerous sceptics who refuse to accept this because stock market behaviour continues to show massive erosion in the value of traded stocks, and unemployment has also failed to return to the low levels of 2000.

The stimulus plan

The Bush Stimulus Plan has many elements to it, but by far the most important is its focus on eliminating federal income taxes on dividends, which corporations pay to their stockholders. Overall the plan proposes to provide tax relief of about $674 billion dollars to taxpayers spread over 10 years. The elimination of stock dividends is estimated to cost $364 billion, from this total. In the first year, 2003, the relief is expected to be $103 billion and the rest is to be spread out over the next 10 years. Although huge, this sum has to be compared to a US economy of about $10.5 trillion. One estimate I have seen in the debates on the plan is that $100 billion of additional stimulus would add about one per cent to the rate of growth in the first year.

The dividend tax relief has been called the "centrepiece" of the plan. The Bush administration's argument in favour of this tax relief rests on four claims. First, it is claimed that the tax relief would help to correct an anomaly/imbalance in the federal tax code as dividends are presently taxed at a higher rate than profits earned from selling stocks, because of the element of double taxation of dividends. Second, it is claimed that this dividend tax relief would encourage funds to flow back into the stockmarket.

This is considered vital as since the recession and the Enron and other scandals, stockmarkets have taken a tremendous beating. According to some estimates, this could boost stock prices by as much as 10 per cent. The encouragement for this flow lies of course in the reduced taxes paid on earnings in the stockmarket. Third, this flow of funds into the stock exchange is expected to encourage 'investment' - one of the main pillars of national expenditure.

Fourth, the increased earnings for those who receive tax relief would lead to increased consumer spending - thereby reinforcing the possibility of increased investment expenditure. Since the increased investment expenditure would lead to new jobs, new purchases and so on, it would have a further multiplier effect on overall national expenditure.

Next week we shall continue this analysis, bringing out as we go along the contrast with backward capitalist states, where the crisis facing globalisation hits hardest and where in fact the least is being done to cope with it. We will also evaluate the merits of the Bush Stimulus Plan.

The Bush plan: Stimulus for whom?

Last week we saw that the Bush Stimulus Plan is projected to offer tax relief of $674 billion over the next ten years, beginning this year with $103 billion. As it has been described, the ‘centrepiece’ of the Plan is the tax relief offered to those who receive dividend payments from stocks, which they own. The Bush theory behind the Plan is that companies are disinclined to issue dividends knowing that they are taxed twice - once as income by the company itself and subsequently by the company’s shareholders when they receive them. As we pointed out last week the expectation is that relief from this ‘double taxation’ would give a boost to the badly battered stockmarket and help to return confidence to the investor class in the USA. The expected rise in stock prices from this relief has been estimated by most analysts at about 10 per cent. It should also be reiterated that while those who receive dividends are important as consumers, the greater expectation is that they would receive a boost in confidence sufficient to lead them to invest in the expansion and growth of their enterprises. It is from this investment effect as it were that the main benefits are expected to flow.

Give-away to the rich or the middle classes?

This approach to stimulating the US economy has raised a firestorm of protest. Going back to the Presidential campaign, the Bush Republican platform has always favoured support for US big-business and the investor class as the engine of growth and driving force for change in the US economy and society. Democrats, and in particular the more progressive, favour a greater reliance on the middle class and to some extent the working class, as the engine of growth and change. Given this difference in outlook, the Democrats are naturally furious at the proposed ‘give-away’ to the rich by the Bush administration in, as they see it, the vain hope that it would stimulate growth. Indeed they have denounced the Bush Stimulus Plan for relying on outdated notions of ‘trickle-down’ economics. They do not accept that the ‘dividend-receiving’ sectors of the US economy will produce recovery, when the evidence shows that traditionally this class has spent little out of government windfalls.

The logic behind this criticism is clear. Simply put it asserts that if the aim of the Plan is to put spending power into the economy quickly, then the most effective, equitable, and direct way of doing this is to provide the tax relief benefit to payroll taxes. If this is done, the middle class (and working class) would have more cash and, with a higher propensity to spend out of income obtained, they would spend more, thereby raising the contribution of consumption to national spending and offsetting the present tendency to economic slowdown and recession. The Democrats therefore have put forward alternative proposals for tax relief. These include expanding unemployment benefits by 26 weeks; giving a tax rebate of up to US$300 per person or $600 per working couple; and, giving more support/funding to the states for spending on health and other programmes.

To counter these allegations, the Republicans claim that over one half of all American households own stocks. This, however, is a misleading statistic. It is true only if pension funds held by workers are included in these holdings. But these pension funds are already tax-exempt, that is the well-known 401 (K) account. There is little doubt, therefore, about the class bias in the concentration of the tax relief. What is notable, however, is the ability of the Bush administration to garner support from the broad American public for measures whose benefits will largely flow to those who in effect represent nationally, a small group of Americans.

The deficit re-emerges

Perhaps the most important consequence of the Stimulus Plan will be its impact on the balance of the national budget. One of the greatest triumphs of the Clinton Administration was bringing the US out of budget deficit into surplus. Readers may recall that the budget deficit had peaked in 1992 at US $290 billion and its negative effect on the US economy and financial system was enormous. Economists in the US have projected that the Stimulus Plan could produced another huge deficit reaching a level of US $300 billion or more, thus setting a record that would eclipse the existing 1992 record of US$290 billion. In his first year in office Bush started the reverse from budget surplus to budget deficit, when he began implementing the tax cuts that were advocated as part of his campaign promise.

Bush supporters have been saying that if the economy is in fact stimulated, increased revenue will flow from increased growth and eventually restore the budget to surplus.

They also add that, in any event, in a period as difficult as the one the US is now facing, government borrowing or deficit creation has become necessary. Clearly they are keeping up their courage through ‘whistling in the dark,’ since the rising level of employment, the sluggish performance of the economy, and a bear market persist.