Economist Joseph Stiglitz in an article in The Guardian, says, “It’s possible to cut the US deficit in a growth-friendly way that reduces inequality. But certain powerful groups won’t like it.”

He says that new austerity strategies now being championed, “will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery.” He says, “Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits.”

Stiglitz says that the deficit-reduction agenda in the U.S., “is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, such as the military-industrial complex, as little affected as possible.”

The plan Stiglitz proposes would curb corporate welfare and would increase tax rates on the wealthy. About his deficit-reduction package, Stiglitz says: “lt would more than meet even the most ardent deficit hawk’s demands. It would increase efficiency, promote growth, improve the environment and benefit workers and the middle class.”

But he is not optimistic that such a sensible plan would ever be enacted because, “It wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking.” Here is Stiglitz’s plan:

First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest?

Second, military expenditures must be cut – not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist. The US has continued as if the cold war never came to an end, spending nearly as much on defence as the rest of the world combined.

Third, corporate welfare must be ended. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms.

  • Corporate welfare accounts for nearly 50% of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers, while lowering prices and increasing poverty among competitors in the developing world.
  • An especially egregious form of corporate special treatment is that afforded to the drug companies. Even though the US government is the largest buyer of their products, it is not allowed to negotiate prices, thereby fuelling an estimated increase in corporate revenues – and costs to the government – approaching $1tn dollars over a decade.
  • Another example is the smorgasbord of special benefits provided to the energy sector, especially oil and gas, thereby simultaneously robbing the treasury, distorting resource allocation and destroying the environment.
  • Then there are the seemingly endless giveaways of national resources – from the free spectrum provided to broadcasters to the low royalties levied on mining companies to the subsidies to lumber companies.

Fourth, create a fairer and more efficient tax system.

  • Eliminate the special treatment of capital gains and dividends. Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)?
  • Increase tax on the wealthy. With more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillon over the course of a decade.
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