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Fighting Austerity and Reclaiming a Future for State and Local Governments

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. Across the United States, from New Jersey to Connecticut to Wisconsin to California, states and municipalities are trying to deal with big budget deficits. The talk in all of these places is about budget cuts, mostly focused on public sector workers. And the issue of how big the cuts are and whether there should be some taxation or not varies depending on whether you have a Democrat or a Republican governor in power, but in all these places, either party, it’s still about austerity. Well, Bob Pollin and Jeff Thompson of the PERI institute in Amherst, Massachusetts, have written a paper, and the gist of the paper is austerity is not a solution. And now joining us from PERI institute is Bob Pollin. Thanks for joining us, Bob.


JAY: So let’s start off. First of all, how bad is the crisis?

POLLIN: Quite serious. Of course, we hear about it every day. We hear about layoffs of teachers. Of course, there was the pitched battle in Wisconsin that is ongoing, whereby the governor, Scott Walker, with the assistance of the notorious Koch brothers, billionaires, financing him, tried to eliminate all union bargaining rights for teachers, health care workers, and other employees of the state, and therefore also cut wages and benefits. But Walker’s case in Wisconsin is only the most publicized of a trend that’s going on around the country, including in states that are controlled by Democrats, including, for example, the biggest state, California, under Governor Jerry Brown.

JAY: Which was supposed to be a victory for progressive politics in California.

POLLIN: Well, it was certainly perceived as such, and continues to be. And the story that was in California is that Jerry Brown is fighting to prevent austerity. Now, what exactly does that mean? That means that Jerry Brown only wants to cut 17 percent from the state budget. That’s considered fighting austerity. The fact that he isn’t going to cut 35 percent, he’s only going to cut 17 percent, is considered kind of the outer edge of what’s politically possible from a progressive standpoint.

JAY: Now, in Connecticut and California with Democrats you do have–at the very least, I guess, they are raising some taxes on the wealthy, which Republican governors aren’t doing at all. Is that significant?

POLLIN: Yeah, that’s right. No. What makes Jerry Brown’s proposal progressive in the broad scheme of things that’s going on in the country is that he’s suggesting that you close the budget deficit half through cuts and half through raising taxes in a mildly progressive way. That’s what makes it progressive. But what that means on the ground is you’re still looking at a cut of state activities by 17 percent, you know, if you spread that out evenly across states and you’re talking about, you know, on average, 17 percent pay cuts for everybody that works for the state.

JAY: So one of the points of your paper is that state revenues as a result of the recession have fallen about 13 percent in relationship to what they were in 2007. But in fact incomes of the highest income earners during that decade were exponentially higher than everybody else, yet they’re still going after public sector workers and going after social programs. First of all, what’s happening to state revenues? And is that not the underlying issue?

POLLIN: This is a severe dropoff. And then what also happens during the recession is that people’s need for social services, like Medicaid and home heating oil, increases. So that’s what makes the budget deficits expand so much. So within that context, obviously, you have to get some relief somehow. The major source of relief up till this past year has been federal government support, revenue sharing. But because of the Republican takeover of the House of Representatives, that money isn’t forthcoming anymore. So the states are left to deal with it essentially on their own as of this moment.

JAY: So if we start going through your paper and your proposals, the first thing is there needs to be a quick fix, and that’s an injection of federal money, which I guess to a large extent is what most of the stimulus money, original federal stimulus money, did do.

POLLIN: The stimulus money did help a lot. The stimulus money closed about one-third of the total deficit on average throughout the states. But that still meant that two-thirds had to be closed by some other means, and the some other means thus far have already been some tax increases and significant cuts. Now, so we’ve already had significant cuts. Now we’re talking about even more severe, another severe, more severe round of cuts throughout the states. And keep in mind what do states do. Instead of calling them states and municipalities, let’s actually talk about what they mainly spend money on, which is education, health care, public safety. So whenever you talk–when Jerry Brown talks about a 17 percent cut in state spending, he’s talking about, on average, 17 percent cuts for education, health care, and public safety. That’s the magnitude of the problem. And not only are the states and municipalities the principal providers of education, health care, and public safety; they’re also collectively the biggest single employer in the economy. So when you cut government spending at the state and local level, you are severely cutting employment, wherein roughly 20 percent of all the people in this economy are employed either directly or indirectly by state and local governments. So we have 9.1 percent unemployment, and at the same time we have state and local governments across the board, Democrats, Republicans, talking about severe cuts, which of course are going to only make unemployment worse.

JAY: Of course, on the other side, they talk about creating jobs, but it seems a little bit contradictory. So let’s get into–your first proposal is there needs to be a quick fix, which is some federal money to stop the immediate bleeding of the states. But then you move on to something more structural, which is the issue of taxation and taxing the wealthy. So what’s your argument about that?

POLLIN: Well, okay. So, yes, the quick fix is to continue the federal revenue sharing, but that isn’t coming. So the states do have to take some action on their own. Now, the obvious thing, the first obvious thing, is to raise revenue through taxes. And, you know, it’s not a good idea to raise taxes in a recession, because you need–people need to have more money in their pockets. They need to spend more to stimulate growth. But if you have to raise taxes, the way to do it is to raise taxes on the wealthy. Why? Aside from any moral virtue there, the wealthy have so much money it’s not going to affect their consumption by any significant amount if you raise taxes [incompr.]

JAY: Now, you give an example of the 2 percent surcharge in Connecticut. Talk about that, ’cause I thought those numbers were rather striking.

POLLIN: Yeah. So in Connecticut a 2 percent surcharge on the wealthiest 5 percent, those whose income is over $200,000 a year, that alone would raise $900 million. That alone would cover one-third, fully one-third of the deficit in Connecticut right now. Now, what would be the impact on that richest 5 percent? It would mean their average income, disposable income, the amount of money they could either spend or save, would fall from about $440,000 a year to $430,000 a year. So, in other words, it’s not going to make any difference in their lifestyle. Now, one of the arguments that’s made against this is you absolutely cannot do these taxes, because then the rich people will leave our state and move to another state. Now, let’s think about a rich person living in a nice home in Connecticut. Are they going to move out of Connecticut because instead of having $440,000 to spend they now have $430,000 to spend? The answer, of course, is no. And research done by my coauthor, Jeff Thompson, has proven that this is the case, that when you raise these taxes on affluent households, of course they don’t move. We see this logically, but he’s also demonstrated it through rigorous empirical research.

JAY: So by the math in your report, if you’d had–this 2 percent on the Connecticut wealthy income tax would generate about $900 million and make maybe a $9,000 difference in their purchasing power. So it seems to me you could go a lot more than 2 percent. I don’t know what the number is, but it would seem to me tens of thousands of dollars before a wealthy person’s going to take their kids out of school and leave their country clubs and their friends and everything else. I don’t know if anyone knows what that number is. It’s certainly got to be more than 2 percent.

POLLIN: So we could think about a 4 percent surcharge. The 4 percent surcharge would cover, you know, roughly two-thirds, as opposed to one-third, of Connecticut’s budget deficit. I mean, these are the types of things that we need to be talking about instead of cutting 15 percent of our teachers or cutting–.

JAY: Or in Connecticut, getting rid of unionized cleaners in schools so that you can farm them out at minimum wage.

POLLIN: That’s right. I mean, we’ve had this discussion, I mean, this thing that’s going on in New Haven, Connecticut. The home of the second-richest university in the United States is talking about essentially destroying the living standards of the custodial workers in the public school system, and that’s seen as a solution, as opposed to, you know, cutting the disposable income for wealthy people from $440,000, $430,000, $425,000. That’s not even under discussion. So these are the types of things that we need to refocus the debate around, to say, okay, without even affecting the lifestyle of wealthy people, how can we retain the basic social compact that we have in this country, that is, there are going to be decent public schools, decent health care, decent public safety, as opposed to wrecking all of these things as a result of the Wall Street-induced recession?

JAY: We’re going to do a story soon on Baltimore, where we’re just going to–on a day that’s about 95 degrees, we’re going to drive around downtown Baltimore and just show everybody how many empty swimming pools in public parks there are. We saw that the other day. Sweltering heat, and none of the public swimming pools had water in them. And as far as we understand it, that’s to do with municipal budget cuts. Alright. Let’s move on to the next piece of your proposal, and that’s the idea of pressuring banks to stop hoarding cash. What’s that about?

POLLIN: Okay. So this one is very important. The point here is the private banking system, commercial banks, as you and I have talked about on previous occasions, are sitting on $1 trillion. A trillion dollars. There is nothing that will come close to getting that $1 trillion into the economy, into productive activities. Nothing will come close in terms of a stimulus as getting that $1 trillion–.

JAY: And let’s just one more time say where did that trillion come from.

POLLIN: And the $1 trillion, you know, almost all of it comes from the fact that the Federal Reserve has held the borrowing rates for banks, the short-term rates for banks, at close to zero for two years–two and a half years at this point. So they get the money for free, and then they sit on it. Of course, the point–the Feds’ at least ostensible purpose in giving them free money is to get the money out into the economy. Now, what can we do at the state level? So this was an issue that was raised to us, you know, by actual state legislators. And I raised the point to them, I said, well, how much leverage do you all have in terms of your own banking services? I mean, which banks do you work with? I mean, you guys are running a lot of money through the financial system. And it turns out that in Massachusetts they were already considering some kind of measure that would just start to put pressure on the banks, which they would just say, look, only the banks that are actively engaged in getting credit out into the communities, through small businesses, first and foremost, and creating jobs through that purpose, are going to be considered by we the state, your primary customer in the state, in terms of banking services. Now, this thing has just started in the state of Massachusetts, but think about–. This is a very large-scale type of activity, a procurement type of pressure that the states can put on the banks, and it doesn’t cost the taxpayers anything. The banks are sitting on the money. And the states say, well, okay, you don’t want to lend money in our state for productive purposes to create jobs, well, then, you know what? You lose our business, and the ones that are going to lend money in the states, that’s the ones we’re giving business to.

JAY: Let’s push to one of your other proposals, which is push infrastructure investment forward. What’s that about?

POLLIN: Okay. So, you know, the fundamental problem that states face in a recession is they’re not allowed to borrow money to cover their operating budgets. That is, they’re not allowed to borrow money to pay teachers, nurses, cops, firefighters. And that’s why you hit a crisis whenever there’s a recession. And when you have a severe recession, you have a severe fiscal crisis, because they can’t borrow money, unlike the federal government. They can borrow money, states and municipalities can borrow money to cover new infrastructure projects, that is, investing in roads, in schools. It could be green infrastructure. You know, it could be improving the electrical grid system. They can borrow money to do those things, and those things will also create jobs. So if the states start to borrow for those purposes, you get the infrastructure investments that you need anyway and you start to engage in job creation, and that’s a way through which the states can operate their own kind of anti-recession fiscal policies.

JAY: Well, we’re going to post the whole paper down here below the video player, and you’ll be able to see a few of the other proposals that Bob and Jeff Thompson make. A final word, Bob?

POLLIN: Well, I just think that–you know, I’m not saying we’ve laid out everything in this paper, but at least, you know, these are the types of discussions that need to take place, as opposed to this incredibly sterile discussion that’s going on between mainstream Democrats and Republicans, which is: just how severe should austerity be? Just how much should we wreck, you know, the social services that state and local governments have provided for generations–education, health care, public safety? Let’s, like, move beyond that and say, well, maybe we should tax the rich a little more. Maybe we can get banks to do what they’re supposed to do. Maybe we can start infrastructure projects faster than we had intended and preserve the basic features of a decent society that way.

JAY: Thanks for joining us, Bob.

POLLIN: Thank you.

JAY: And thank you for joining us on The Real News Network. And don’t forget over here the donate buttons, ’cause if you want to see more of this kind of work on the economy, if you don’t do that, we can’t do this.

End of Transcript

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