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Obama's Populism versus McCain's Free Trade

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Even before the ethics questions raised by the New York Times, John McCain appeared to be ill suited to be a President who would roll back the widespread taxpayer subsidies lavished on business elites.

In the wake of their recent presidential primary victories in Wisconsin, Barack Obama and John McCain appear destined to wage a fight for the office of President that not only will pit an advocate for "change" against a defender of many of George W. Bush's discredited policies (especially his war in Iraq and his tax cuts for the rich), but also pit a young, vibrant (perhaps cocky) 46 year old black upstart against a hot-headed, expletive-spewing war hero and old white man (previously disgraced as one of the Keating Five and now, perhaps, once again by revelations of past romantic ties with lobbyist Vicki Iseman, for whom he wrote letters to government regulators) who will be 72 years old by the time he's sworn into office. The election seems destined to become a choice between America's future and America's past.

With this contest in mind, it seems appropriate to contrast Senator Obama's economic populism and Senator McCain's steadfast defense of free trade in the context of a new book by David Cay Johnston, Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill).

America's highly productive work force has contributed greatly to the country's immense national wealth. According to David Cay Johnston, "For each dollar per person in 1980, the economy in 2006 generated $1.68." [p. 10] Yet, notwithstanding the wealth they've created, the average income of the bottom 90% of Americans actually has withered -- from a peak amount of $33,001 in 1973 to a modest $29,143 in 2005 (after adjustments for inflation).

If you look at the bottom 50% of the population, the picture is even worse. In 1980 their average income was a pathetically low $15,464. Yet, by 2004 it had fallen to $14,149. Sure, their taxes were lower in 2004. But all that did was reduce the amount of income they were losing each week from $25 to $15. The question is: "Why should they be losing income when the country's wealth has been growing by leaps and bounds?"

Mr. Johnston provides part of the answer: "Autoworkers have begun working under new contracts in 2007 that cut the wages by as much as $13 per hour. That is a pay cut of more than $26,000 annually. Compounding the pain are cuts in retirement benefits and health care. Together these throw workers who had reached the middle rungs of the income ladder back down into the lower half." [p. 44]

Such givebacks are not an accident. They come in the wake of "tens of thousands" of jobs lost to "the rigged game the politicians, and their donors, call 'free trade.'" [pp. 43-44]

Rigged game? Yes, in addition to the obvious inducement to relocate factories overseas -- the immense difference in wages and benefits that might cost a factory in Indiana $40 per hour for labor, but only 25 cents in China [p. 46] -- the U.S. Congress and U.S. Presidents, at the behest of corporate socialists and their lobbyists, have rigged the tax laws to subsidize the already lucrative business of shipping U.S. jobs abroad.

Mr. Johnston explains how it works in China. "After President Nixon's visit to China in 1972, American oil companies sought to explore there. Right off, they asked the Chinese to enact a corporate income tax."

"With a Chinese corporate income tax," argues Johnston, "the taxes they [U.S. corporations] owed to the United States would go down for two reasons." First, "American business profits earned overseas are not taxed so long as the money stays offshore." Second, "the United States allows American companies to reduce taxes on their profits by the amount they pay to foreign governments. This is not the usual deduction worth 35 cents on the dollar, but a dollar-for-dollar credit." [p. 40]

(Note: It was Andrew Mellon, in his capacity as Treasury Secretary during the 1920's, who "persuaded Congress to adjust the corporate income tax to give oil companies - and any other companies earning profits overseas - the dollar-for-dollar credit against taxes due to Washington." [p. 41])

Moreover, "the corporate income taxes paid in China are not like those in the United States. Instead of going for the general support of the government, money paid to Beijing is often used to benefit the company that pays. Taxes may finance a new road or a railroad spur or police presence and other services the company requires."

"But wait, there's more."

"A company with operations in the United States and another country can borrow money at home, deducting the interest and thus lowering its American taxes. At the same time it can earn interest on untaxed cash it keeps overseas. So when an American company closes a factory here and moves it to China, provided it meets some technical rules, it can deduct the interest charges on its United States tax return while building up profits offshore that may never be taxed." [pp. 41-42]

Thus, Mr. Johnston's sobering conclusion: "Under current government rules, destroying American jobs and creating jobs overseas is the single most effective way for manufacturing companies to increase profits. From the point of view of shareholders and executives, any policy other than moving equipment and jobs offshore as fast as possible is a waste of corporate assets." [p. 47]

As to the common assertion by free trade advocates that it brings new investment to the United States, Mr. Johnston notes that such investment is not helping to create jobs here. "The net effect of insourcing by foreign-owned companies [between 1990 and 2003] was the elimination of 3.4 million American jobs. While insourcing creates some jobs, the constant pressure to move even those jobs offshore is the inevitable result of how our current government rules encourage this labor arbitrage." [p. 47]

Speaking in Houston on February 19, 2008, Senator Obama declared: -- "I want to take away those tax breaks to companies that are shipping jobs overseas. We're going to give them to companies that invest right here in America." Senator McCain did not address the issue during his February 19 victory speech, but he's on record for asserting: "It sounds like a lot of fun to bash China and others, but free trade has been the engine of our economy. Free trade should be the continuing principle that guides this nation's economy." [2007 Republican debate in Dearborn, Michigan Oct 9, 2007]

Free trade might very well be "the engine of our economy," but that engine hasn't done much to drive the average annual income of the bottom 90% of American workers. On the other hand, it has proven to be enormously lucrative for the financiers and factory owners who arrange the overseas deals.

As David Cay Johnston sees it, the tax laws subsidizing the free trade that impoverishes American workers or causes them to lose their jobs is just one aspect of the corporate socialism that has taken hold of America since the election of Ronald Reagan. Under the guise of fostering the so-called invisible hand of the market economy through deregulation and privatization, taxes paid by the bottom 90% on the income ladder have been lavished upon the corporate elite as subsidies.

According to Johnston, "Sam Walton practiced corporate socialism. As much as he could, he put the public's money to work for his benefit. Free land, long-term leases at below-market rates, pocketing sales taxes, even getting workers trained at government expense were among the ways Wal-Mart took every dollar of welfare it could get. Walton had a particular fondness for government-sponsored industrial revenue bonds, which cost him less in interest charges than the corporate bonds the market economy uses to raise money." [pp. 99-100]

Mayor Rudy Giuliani gave "an unannounced gift of $25 million in public funds" to both the New York Yankees and the New York Mets during his last days in office. That is, he "let each team hold back $5 million a year on their rent for Yankee and Shea stadiums, which the city [taxpayers] owns, and use the money to plan new stadiums."

"The Yankees used some of this money to hire lobbyists to arrange a further taxpayer subsidy for their new stadium." According to the Independent Budget Office for the city, the taxpayers' subsidy to the Yankees amounted to $275.8 million. When Johnston confronted Yankees President (and former Giuliani aide) Randy Levine about the morality of taking money from taxpayers who have far less money than George Steinbrenner, Levine not only conceded "that taxes are taken by threat of force," but also that "gifts from taxpayers to those who invest in big projects 'are the way government works today.'" [p. 72]

According to Johnston, when the Supreme Court refused to even hear the case of citizens from Toledo, Ohio -- who had their businesses and homes seized by the city, in order to give Chrysler the land it needed to rebuild its Jeep plant -- it "sent a clear signal that the policy of the United States is that the government can take from the many to give to the few - and those who object will not have their grievances heard by the courts" [p. 93] In the face of such legally sanctioned corporate socialism, the most effective response would be a widespread taxpayer revolt.

Finally, as if to guarantee that it's the taxes of the bottom 90% that are used to subsidize their wealth-creating enterprises of the corporate socialists, the Bush administration and Republicans in Congress pushed through tax cuts that not only gave 53% of the savings to the top ten percent of income earners in the United States, but also 15% of the tax savings to the 300,000 people who constitute the top tenth of one percent on the income ladder. In 2005, their average annual income was $25,726,965.

On February 19th, Barack Obama asserted that "we're going to rollback those Bush tax cuts that went to all the wealthy people, and we're going to give tax cuts to ordinary families, people who are making less than $75,000. We will offset your payroll tax." Like Obama, Senator McCain once opposed Bush's tax cuts for the rich. But, he's flip-flopped during his run for President and now will uphold them if elected.

Consequently, if David Cay Johnston is correct when he answers the question, "Why are the rich getting so much while the middle class struggles and the poor fall behind?" by concluding that "the elites have captured the government and are milking it for their own benefit" [pp. 22-23], then free trading, tax cut flip-flopper John McCain hardly seems to be the candidate to roll back corporate socialism's assault on the bottom 90% of the income ladder.

Walter C. Uhler is an independent scholar and freelance writer whose work has been published in numerous publications, including The Nation, the Bulletin of the Atomic Scientists, the Journal of Military History, the Moscow Times and the San Francisco Chronicle. He also is President of the Russian-American International Studies Association (RAISA).