Before World War I, government spending was less than 10 percent of the economy. During the Great Depression, it reached 20 percent. By 1960, it hit 30 percent. And so, for the past fifty years, one in every three dollars spent in America were spent by Uncle Sam.

In 2012, the Republican presidential candidates have staked their campaigns on a promise to reverse this trend. Many Republicans openly pine for the good old days of rugged individualism — the days before Social Security and Medicare, before the FDA and the EPA, before income taxes and government-backed mortgages.

You might think that such an extreme position belongs to rabble-rousers like Glenn Beck but not mainstream pragmatists like Mitt Romney. You’d be wrong.

Candidate Romney has proposed cutting taxes annually by $180 billion, mostly for the top 1 percent of income earners. At the same time, he has pledged to balance the budget without cutting defense spending. According to the Center on Budget and Policy Priorities, the only way to fulfill all these promises is to cut nondefense programs by 50 percent.

In other words, Romney wants to get rid of half of everything the government does, except Social Security and the military.

Half of our schools. Half of our national parks. Half of our federal law enforcement. Half of our food safety. Half of our clean air. Half of our veterans’ health care. Gone. Forever.

And Romney is no exception. If anything, his proposal is tame in comparison. Newt Gingrich’s proposal, for example, would cut taxes by $850 billion. You can just imagine the carnage.

In Tuesday night’s State of the Union address, President Obama staked out the opposite position, asking Congress to raise taxes slightly on millionaires and to use half the savings from ending the wars in Iraq and Afghanistan to reduce the budget deficit. The other half he pledged to public infrastructure projects.

And not a moment too soon.

Over the last fifty years, infrastructure spending has steadily fallen as a share of the economy. We now spend 2.4 percent of GDP on transport and water infrastructure, compared to 5 percent in Europe and 9 percent in China.

According to government reports, one in four bridges need significant repairs or are bearing more traffic than they were designed for. 700 water pipes burst every day because they’ve worn out. One in three roads are in substandard condition, increasing traffic fatalities, congestion, and gas emissions. 1,300 dams have been designated “high-hazard,” meaning they could fail and result in fatalities. We spend $50.6 billion every year just to clean up spills from old sewage systems.

In recent years, state and local governments, which contribute the vast majority of infrastructure spending, have shrunk significantly in the wake of unprecedented budget shortfalls. The federal government needs to step up, but the Republican candidates would rather scale down.

There will never be a better time to rebuild our infrastructure. Millions of Americans desperately need jobs. The government can borrow at near-zero interest rates.

We’ve been here before.

In 1935, with unemployment at 20 percent, the government created the Works Progress Administration. Over the next eight years, the WPA provided eight million jobs. It built or renovated 560,000 miles of roads, 20,000 miles of water pipes, 417 dams, 2,700 firehouses, 5,000 schools, 1,800 hospitals, 2,000 stadiums, 1,800 runways, and 6,000 fire and forest trails. By 1941, before the United States entered World War II, unemployment had fallen to 6 percent.

We can do it again.

Or we can go back to the nineteenth century. We can go back to a world without paved roads or bridges or clean water, with one-room schoolhouses spaced many miles apart and hospitals that took hours to reach. We can go back to the days when sewage was untreated and floods overwhelmed many towns, when recessions were more frequent and unemployment rose more sharply.

We can go back to small government, if we’re willing to give up our way of life.

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This op-ed was published in today’s South Florida Sun-Sentinel.

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Check the major newspapers. Everyone is writing about the economy. For almost five years now, they’ve been predicting strong economic growth just around the corner. And for almost five years, they’ve been wrong. Stumped. Surprised.

The recession ended three years ago, they say. How can unemployment still be so high? How can growth be so slow?

So they make up explanations, usually political. Their economic models failed. Their credibility is in doubt. They must blame someone else. So they blame the government.

Taxes are too high, they say, even though taxes are lower than they were before the recession. Regulations are too strict, they say, even though corporations are making record profits. The stimulus slowed growth, they say, even though it created or saved over 3 million jobs.

And they never mention the housing bubble. Even though everyone and their dog knows that the collapse of the housing bubble caused the recession.

From the end of World War II to the late 1990s, housing prices tracked inflation. There were booms and busts in the 1970s and 1980s, but they always came back to the same long-run average. Then, from 1998 to 2006, they rose approximately 90 percent, after adjusting for inflation. They’ve been falling ever since.

Real housing prices are now about 10 percent above their long-run average, as is the price-to-rent ratio. Which means they still have further to fall, but we can finally see the light at the end of the tunnel.

If you’ve taken Econ 101, you’ve probably heard of the “housing wealth effect.” It says that, for every dollar that housing wealth declines, consumption shrinks by 5 to 7 cents. Since the peak of the housing bubble, we’ve lost almost $8 trillion in housing wealth. That’s $400 to $560 billion less consumption. And that doesn’t include indirect effects, like the resulting stock market decline, which lost another $4 trillion in wealth.

It takes an even bigger chunk out of overall output when you add residential investment, which fell 24 percent in 2008, 22 percent in 2009, and 4 percent in 2010.

Given that knowledge, it’s hard to imagine anyone predicting a strong economic recovery while housing prices still have further to fall.

But the housing market is improving. Residential investment has started to grow again, as has construction employment. Whereas there was a huge glut of unsold homes in 2009, that inventory is almost back to normal levels. Existing home sales have been increasing for the last six months, though new home sales are still stuck near their post-recession low.

The decrease in unemployment is what everyone is talking about, but it’s mostly due to people dropping out of the workforce — being so discouraged that they stop looking for work — rather than a significant increase in jobs. The number of job openings was unchanged in November. 200,000 new jobs in December may sound like a lot, but it would take 100 more months just like it – that’s 8 years — to return to full employment.

A lot is riding on a turnaround in the housing market, including Barack Obama’s re-election. If the administration wants to increase its odds of staying in the White House, it’s not taxes or regulations or government spending that need easing. It’s struggling homeowners.

They can start by appointing an FHFA director who will encourage borrowers with government-backed loans to refinance at lower interest rates. And they need to be more aggressive in investigating widespread mortgage servicing fraud at major lenders.

We are nearing the end of the Great Housing Bubble. It has gone up, and now it’s almost done coming down. Let’s hope we learned our lesson…at least for a little while.

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This op-ed was published in yesterday’s South Florida Sun-Sentinel.

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Here’s how it really went down.

As part of the Democrats’ stimulus bill in 2009, the Making Work Pay credit reduced taxes by 6.2 percent, up to $400, on earnings, phased out between $75,000 and $95,000. (The numbers were double for couples.) It expired at the end of 2010.

Instead of renewing the MWP credit, Republicans insisted on replacing it with a two-percentage-point cut in employees’ payroll taxes, which reduced the average tax cut for low-income taxpayers and quadrupled the average tax cut for high-income payers — even though the poor are far more likely to spend those tax cuts and stimulate the economy.

The payroll tax cut cost almost twice as much as the MWP credit, but it didn’t affect the Social Security trust fund because the Treasury filled the hole with general revenues. In other words, they borrowed and increased the deficit. Apparently, Republicans didn’t care as much about the budget deficit as they did about tax cuts for the rich.  

Immediately after the President signed the payroll tax cut, leading House Republicans told The Hill that they had “no plans to extend” the tax cut beyond 2011.

They continued this message throughout the summer. House Budget Committee Chairman Paul Ryan said, “Temporary tax changes don’t work to create economic growth.” (Which we know to be false. The 2008 tax rebate increased the average household’s spending by $495, keeping consumption level while housing wealth plummeted.) House Speaker John Boehner called the tax cut “another little short-term gimmick.”

In the face of this opposition, Democrats pushed to extend the payroll tax cut, as well as extend unemployment insurance (UI) benefits for the long-term unemployed and postpone cuts in Medicare reimbursement rates for doctors (a.k.a. the “doc fix”). All were scheduled to expire on December 31.

Instead of increasing the budget deficit again, Democrats proposed paying for these extensions by increasing taxes slightly on incomes over $1 million. Senate Republicans blocked this proposal twice.

On December 13, House Republicans passed their own version. In addition to extending the payroll tax cut, UI benefits, and the “doc fix,” their bill allowed states to drug test all UI recipients, reduced the maximum UI eligibility from 99 weeks to 59 weeks, required the President to decide whether to build an oil pipeline from Canada to the Gulf within 60 days, extended tax reductions for corporations, loosened environmental regulations, allowed higher premium increases for flood insurance, permitted state public safety networks to use the public spectrum for private purposes, increased the guarantee fees charged by Fannie Mae and Freddie Mac, and froze the salaries of federal workers for the following year.

With the deadline fast approaching and no compromise in sight, Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell agreed to postpone the debate — but not at the expense of the 160 million Americans whose taxes were set to go up in two weeks. On December 17,  the Senate passed a two-month extension of the payroll tax cut, UI benefits, and “doc fix,” with plans to work out a longer deal after the holidays.

House Republicans rejected the deal. Boehner said it would increase “uncertainty” in the economy. He wouldn’t even let the House vote on it.

Of course, he was lying. He never wanted the tax cut. He said so six months earlier. And he reiterated that point when he packaged it with a laundry list of Republican demands that he knew Democrats wouldn’t accept. He was trying to raise your taxes.

Fortunately, he didn’t get away with it. On December 22, he caved. On December 23, President Obama signed the two-month extension.

But House Republicans will live to fight another day. The question is: Will they fight for you?

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This op-ed was published in today’s South Florida Sun-Sentinel.

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In 1972, the Nixon Administration created the Consumer Product Safety Commission (CPSC). Its purpose was relatively straightforward: to enforce uniform standards, minimum levels of safety, on consumer products sold in the United States.

Forty years later, we can say that the CPSC has been a magnificent success. Product-related death and injury rates have declined significantly since its creation. Its safety standards for cigarette lighters, cribs, and baby walkers save more than $2 billion annually — more than its entire cumulative budget since 1972.

So it makes sense that Harvard law professor Elizabeth Warren drew on the CPSC as inspiration for the Consumer Financial Protection Bureau (CFPB), which Congress created in the Dodd-Frank Act of 2010.

“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house,” wrote Warren back in 2007. “But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street — and the mortgage won’t even carry a disclosure of that fact to the homeowner.”  

But many politicians don’t care. In their view, if borrowers sign loan documents that they don’t understand, that’s their own damn fault.

This may be the most pernicious myth to emerge from the financial crisis.

As Michael W. Hudson documents in his behind-the-scenes book The Monster, these multibillion-dollar mortgage empires grew at astronomical rates by purposely hiring inexperienced salesmen whom they could “brainwash”; teaching them how to find and take advantage of uneducated, vulnerable borrowers in financial distress; ordering them to lie to, spy on, and hide critical information from borrowers; creating a culture that encouraged salesmen to forge documents and lie to regulators and underwriters; and firing anyone who didn’t employ as many of these unethical and illegal tactics as possible to increase loan volume.

These were expert con artists, perpetrating fraud on a level unseen since the vicious dog-eat-dog days of the late nineteenth century, back when consumers couldn’t even trust food not to poison them or medicine not to kill them. Unrestrained capitalism is a dirty business.

Corporations want us to believe that they will regulate themselves, that no firm with a reputation for shoddy products will stay in business for long, but we’re not that stupid. Our eyes are open, and the millions of fraudulent loans make it impossible to look away.

The Monster is to our generation what Upton Sinclair’s The Jungle was to an earlier age: a warning, a call to action, a witness to injustice so widespread that the reader is continually shocked at how human beings can be so cruel, so callous, so sociopathically greedy.

In 1972, there was no need for the CPSC to regulate mortgages. Loan documents were only a few pages long, and most financial institutions weren’t allowed to sell the risky products that became popular in the 2000s.

Congress began tearing down those barriers in the 1980s, and bankers like Roland Arnall, the founder of the biggest subprime empire in history, jumped at the chance to expand their business. When those banks were sued and shut down for fraudulent lending, Arnall and his colleagues set up shop at unregulated non-depository lenders, financed by Wall Street. The few regulations that still applied were divided among seven agencies, which were severely underfunded by the Bush administration.

The CFPB can change all that. Its power is consolidated under one roof, its budget is safe from Congressional interference, and it can prevent any lender from selling mortgages that will sink us into another recession.

But without a director, the CFPB has no legal authority. Senate Republicans are blocking President Obama’s nominee to head the CFPB because they believe it’s too powerful, but as Ari Berman reports in The Nation, “the CFPB is the only banking regulator whose budget will be capped…and whose rules can be overturned (by a two-thirds vote from the Financial Stability Oversight Council…).” The real power imbalance lies elsewhere.

Our indifference to the suffering of millions of homeowners is staggering and has gone on long enough. If Senate Republicans don’t step aside, President Obama must appoint a CFPB director when Congress is in recess.

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This op-ed was published in today’s South Florida Sun-Sentinel.

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When asked to analyze Herman Cain’s “9-9-9″ tax proposal, Prof. Mishra spent half his op-ed talking about Rick Perry’s flat tax proposal instead.

Okay, I’ll take the bait.

According to Perry:

The plan starts with giving Americans a choice between a new, flat tax rate of 20% or their current income tax rate. The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents.

The strange thing is, Prof. Mishra never analyzes this proposal. He doesn’t tell you how it would affect you. He doesn’t tell you whether he agrees with Perry’s claims. He just says that tax cuts are good and, well, this is a tax cut.

Except it isn’t. At least, not for the 60 percent of Americans who would pay more under Perry’s plan than under Obama’s:  

Which makes it a classic, massive, indefensible Trojan horse. And you know what I think of Trojan horses…

Ronald Reagan signed the first of two famous tax cuts on August 13, 1981. A few months later, one of his senior advisors gave an interview to the Atlantic Monthly where he revealed that the administration really didn’t care about cutting most people’s taxes. The tax cuts that affected most Americans, he explained, were “a Trojan horse to bring down the top rate” for the rich.

The Trojan horse was the giant wooden gift that the city of Troy received from the Greeks, only to find that Greek soldiers poured out of the horse once they were inside the city. In the Reagan administration’s metaphor, the “Greeks” were tax cuts for the rich, and the unwitting city of Troy was, well, the rest of us.

It worked.

But it came at a price.

In the three decades preceding Reagan, the bottom 90 percent of Americans enjoyed a 75 percent increase in their inflation-adjusted incomes. In the three decades after Reagan, these same Americans enjoyed only 1 percent income growth, while the richest 1 percent saw their incomes grow by over 100 percent.

It wasn’t supposed to be this way. According to Reagan and his team, lower taxes were supposed to encourage the rich to work harder and invest more, thus benefitting the rest of us. If they know that less of their income will go to the IRS, the theory went, they have a greater incentive to work more hours. All of a sudden, each hour becomes more valuable to them. Economists call this the “substitution effect” because they substitute work time for leisure time.

But lower taxes also have an “income effect.” Because the IRS takes less from each paycheck, the rich can achieve a high income faster and therefore work less.

Even if the substitution effect outweighs the income effect, the rich won’t necessarily invest that money in productive American industries. They could invest it abroad — which they did, especially in Asia. Or they could invest it in ways that only benefit the rich — which they did, on Wall Street. Or they could invest it in ways that harm the economy — which they did, again on Wall Street. Or they could stockpile it for a rainy day — which they did, in corporations all across America.

So there were plenty of reasons to believe that “trickle-down economics” would not trickle down.

And it didn’t. When Reagan authorized the tax cut, 7.4 percent of the workforce was unemployed. Over the next sixteen months, it rose to 10.8 percent.

The weak economy plus the tax cuts took a bite out of tax revenue. In an effort to reduce the budget deficit, Reagan signed a tax increase in late 1982. The following year, the economy grew 4.5 percent, the stock market rose 35 percent, and unemployment fell to 8.1 percent.

Clearly the tax cuts didn’t stimulate the economy, but even after the 1982 increase, tax rates were still lower than they’d been before 1981. If Reaganomics had worked, the business cycle from 1979 to 1989 should have experienced much faster growth than, say, the business cycle from 1973 to 1979. And yet, both cycles had the same annual growth rate: 3 percent.

History has repeatedly demolished the case for this Trojan horse.

When the top marginal tax rate was 75-80 percent, the economy grew over 4.5 percent per year. When it was 50-75 percent, the economy grew 3.5 percent. When it was 35 percent, the economy grew less than 2 percent.

When the top rate was 69-80 percent, jobs increased 2.5 percent per year. When it was 50 percent, they increased 2 percent. When it was 35 percent, zero net job growth.

The tax cuts that George W. Bush signed in 2001 and 2003 were the ultimate Trojan horse. They boosted after-tax income for the middle class by 2.3 percent, but that pales in comparison to the 7.5 percent increase enjoyed by households with incomes over $1 million. In 2007, the average middle-class American paid 23.4 percent of their income to the IRS, while the richest 400 Americans paid an average of 18.7 percent in taxes.

The Greeks have left the horse and taken over the city.

This time, the results were even worse. If trickle-down economics worked, the economic expansion from 2001 to 2007 should have towered over previous expansions, especially ones like the 1990s when Congress raised taxes twice. Instead, the post-2001 expansion ranked below average by every major measure: GDP growth, consumption, investment, net worth, wages and salaries, and employment. In the 2000s, the economy grew slower than during any previous decade or half-decade since the Great Depression.

The 2001-2007 expansion was so bad that the percent of the population employed actually declined while the economy was getting bigger. In 2001, 64 percent of the population had a job, down to 63 percent in 2007. Today, it hovers below 59 percent.

It was also the first post-WWII expansion in which household income declined. Poverty increased more than it had during any previous expansion. (During most expansions, poverty actually decreases.) And investment grew slower than it had in the 1990s after two tax increases.

In fact, the 1990s defied everything Reaganomics predicted. Unemployment fell to the lowest it had been since 1969, without generating inflation. Productivity growth exceeded the Reagan era, as well as the preceding decade. And, of course, the budget deficit turned into a surplus.

The Bush tax cuts eviscerated that surplus. Federal tax revenue, relative to the size of the economy, is now lower than it’s been anytime since the 1940s. The United States ranks near the bottom of the industrialized world in tax revenue. The average federal income tax rate for a middle-class household is the lowest it’s been in five decades — and it should stay that way. But there is no economic justification for cutting government spending that affects millions of Americans while cutting taxes for the rich. Without the Bush tax cuts, the current budget deficit would be almost 25 percent smaller.

In 2010, President Obama proposed eliminating the Bush tax cuts only for individuals with incomes above $200,000 and households with incomes above $250,000. In 2012, Congress should do exactly that: Keep the horse. Ditch the Greeks.

Oh, and by the way, Perry’s proposal would increase the budget deficit by $1 trillion, or 77 percent of the current deficit. Not that that matters.

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