February 4, 2011

Of Blood and Stones

Note: This post Contains a lot of links, including to some publications with subscriber-only content. However, in the case of The Wall Street Journal and the Financial Times, it is possible to get around the subscriber firewall by taking the URL for the link, posting it into Google and hitting search, and then following the first link from Google to the story itself. Don't ask me why this works, but use it while it lasts!

The key front in the class struggle in the United States over the rest of this year is going to be over the shape of public budgets. Not just the Federal budget, but especially budgets at the lower levels: states, counties, municipalities, school districts, and public authorities and commissions covering everything from parking garages to parks to mass transit. Because there are thousands of different jurisdictions, the struggle will have a thousand variations, but make no mistake: it is a struggle of class against class, and the strategy of the political representatives of the ruling class benefits when the working class is divided. And I scarcely need to point out that the ruling class is set to win this one, big-time. At stake are the basic services and living standards of the working-class majority, but especially its poorest sectors. Unless the majority gets organized really fast, with the aid of some dynamic and visionary leadership to overcome those divisions, then the long-eroded living standards and overall social well-being of the working class are going to erode still further.

In other words, the people need a left, perhaps more now than at most times in history. And if the left is to develop a strategy to defend the people's interests in the midst of the state and local budget crisis, it is important to understand not only the causes of the crisis -- the bad economy combined with bad policy -- but also the interests behind it.

There are two capitalist interests behind the crisis, a proximate one and an ultimate one: (1) the rent-seeking of the bondholders and (2) the continued ideological offensive of the capitalist class as a whole. We should look at each of these in turn.


It's not hard to notice in this country that we do not, as a general rule, tax rich people to pay for projects of public benefit. Instead, we borrow the money from them and pay them back -- with interest -- for the privilege. Even in a more rational capitalist society (or indeed in a socialist one), there would be a need for debt financing for large public projects, but public and non-profit finance in the USA is set up to disproportionately benefit wealthy interests, and to ensure that the people who pay for most of it are the people least able to do so. If you were a vulgar Marxist, you might even say that the whole thing was deliberately set up this way.

States, school districts, counties, public authorities and other public entities, as well as large non-profit institutions (such as universities and hospitals), all raise capital by issuing tax-exempt bonds. These are also referred to as muncipal bonds or "munis." The borrower -- also called the "issuer," or the "obligor" in the case of non-profits -- then pays the bonds back over a period of years (30 is a typical figure). The borrower will pay a lower interest rate to the bondholders than a for-profit borrower with a similar credit rating would have to pay, because the bonds are tax-exempt. However, you have to be in a high enough tax bracket for the tax exemption to be worth it; if you're a person of more modest income and want some fixed-income securities for your retirement account, it is more worth it to you to buy for-profit corporate bonds, because the tax exemption on the muni bond would not be enough to offset the higher interest rate that you will receive from a for-profit borrower.

The result is that only rich people buy municipal bonds. They constitute a core of people who have a direct interest in state and local government finance, and whose sole concern is ensuring that they will be paid on time. This is why 60 Minutes chose a Wall Street analyst like Meredith Whitney to lead December's campaign commercial for Chris Christie. (Well, that and the fact that Whitney is taking an especially alarmist line on munis -- but her alarmism has been accurate in the past and may turn out to be accurate in this case as well.)

It is important to keep this in mind when public sector workers' pensions are described as over-generous. What you are hearing here, first of all, is the rentier's complaint that someone who has actually worked for a living his or her whole life is entitled to a claim on the financial resources of troubled state and local governments, when there might be danger of skipped payments or even defaults on obligations to the bondholders. This won't do, and as of right now the bondholders are a considerably more powerful constituency than organized public workforces, no matter how much the propaganda says otherwise. Cross city workers, and as a politician you can more than make up for any hit to your campaign PAC by scapegoating them in the eyes of an increasingly unsympathetic public, hardened by its own experiences in a dreary economy. Cross the bondholders, on the other hand, and your city is screwed, relatively speaking, forever: the city will never be able to borrow from these people again, except maybe at exorbitant interest rates that it could never afford anyway. And in that case you can kiss goodbye any ambitions of your own for higher office.

While this may sound simplistic, in its basic outlines this is how class rule actually happens at the local level; how the loyalties of politicians to the capitalist system are cemented at the beginning of their careers; and how the options for even limited reforms in favor of the working class become more and more restricted, so that a "There Is No Alternative" mentality reigns. Organizations of the working class, including its poorest sectors, can at best win improvements around the edges of such a system, but any gains are precarious, especially during times of austerity when the powerful rentier constituency of bondholders fears for their interest payments. Absent a mass movement (more than just a collection of working-class organizations), this situation will not be turned around.

The Ideological Offensive

This brings us to the second, "ultimate" and more important interest behind the state and local fiscal crisis: the ideological offensive of capital as a whole.

It is not necessary to go into detail here about the 30 years of the right-wing offensive since Reagan. But we should say something about what it is about. In a capitalist society, no matter how much the right wing likes to rant about the need for "smaller government," there is still a need for a state. Basic state functions at all levels of government are necessary for capitalism's functioning. The questions are: (1) who pays for the state and (2) who benefits from state action?

Capitalists are clear on what they would prefer: as much of the tax burden as possible shifted down the social scale; as few benefits as possible to go to the working class and the poor, both so that the state will be less expensive and so that people will be obliged to work for less because there is less-reliable state support for a basic income, health services, unemployment insurance, etc.; more benefits distributed upward in the form of privileged enclaves for some services (like lily-white school districts) as well as subsidies for "research and development" and other corporate welfare; and a preference for enhanced repressive functions (military at the national and international level; police and prisons at the lower levels of government) instead of social-welfare functions.

Make no mistake: the ultra-right view of proper state functions is the dominant one in the capitalist class. There may be "enlightened" capitalists who favor some ameliorative social-welfare measures, or who (like Warren Buffett, or Bill Gates's father) are relatively reasonable on tax matters. But the preponderant view among capitalists is that they are entitled to as much as they can get away with, and they chafe under the restrictions imposed on them by democracy, even as democratic initiative among the masses has corroded.

If you are reading this, chances are you have been frustrated with the Obama Administration from the left, and that is true whether or not you are among those who found the administration's deference to corporate interests surprising. The capitalist class, however, has by and large not seen the Administration in such a light. They have seen Obama as problematic, even hostile. The focus on health care restructuring (which in its final form will hit insurance company margins and potentially cost money in fines for employers who do not offer at least a minimal level of health insurance) and the Administration's appointment of the "pay czar" and occasional verbal lashing of the banks -- mild as these measures may have been, business viewed them with real alarm.

After the Democratic defeat in the mid-term elections, the Obama Administration did not see a need to re-energize the demoralized base, but a need to move further to the right to capture a rightward-moving "center" where it believes the votes really are. (Incidentally, this ought to serve as a lesson against all forms of "left" abstentionism or 1%-of-the-vote "third party" dilettantism in national elections.) Obama's "campaign to make peace with business" -- capped off by a Wall Street Journal editorial by the president himself announcing a campaign against regulations that "have stifled innovation and have had a chilling effect on growth and jobs" -- was seen by capital as the chastened contrition of a servant who had gotten out of hand. They describe it as "a small beginning in a much, much bigger arena of problems," saying that "the business community should have a seat at the table" now, as if it once did not.

You don't have to look hard to find a left critique of the current Administration that mentions the substantial Wall Street funding of the Obama campaign. It would be a mistake to see this as an expression of Wall Street's desires, however. Large sections of capital leaned toward the Democrats in 2008 because the Republicans in general and Bush in particular had been spectacularly discredited. To the extent that the capitalist class was dissatisfied with Bush, it was not for his domestic policies -- by and large, they loved their tax cuts -- but for his adventurist "over-reach" in warmongering, which was out of step with the "realist" imperialism of the Kissinger/Scowcroft/Eagleburger variety. But overseas disasters combined with real domestic discontent to form a perfect storm for Republicans, and capital recognized that it had to make the best of a situation where the population still has to be occasionally consulted about who should govern. Especially with the apex of the financial crisis, a Democratic electoral victory became inevitable in 2008, and capital steered its money toward the sure winners in the hopes of influencing policy. It is true that they felt comfortable doing this precisely because Obama was so favorable to capitalist interests; Wall Street's tolerance of "populism" from politicians does not go far at all. If -- for instance -- John Edwards had been the nominee, it is unlikely that he would have received such a warm welcome from capital, especially if he had continued to say the same things during the general election that he had said during the primary.

The right wing, with the approval of the broad swath of the capitalist class, scored an early victory in the Obama years by limiting the size and character of the economic stimulus. The "moderate" group in the Senate led by then-Republican Arlen Specter kept the total under $800 billion and weighted it more toward tax cuts. But the most important people's victory in the fight over the stimulus was the fiscal relief that the government granted the states, in the form of a greater Federal share in Medicaid funding (the Federal Medical Assistance Percentage, or FMAP) and more education funding.

With the Republicans taking over the House, further aid to the states is now out of the question. This is in keeping with Wall Street preferences and the preferences of finance capital worldwide, as evidenced by the position of Jamie Dimon and other leading bankers at the most recent Davos meeting, where they said that "governments around the world must stop banker-bashing," and also complained of high government debts and the possibility of inflation. These are absurdities in a world economy that is still as depressed as this one, but it is important never to underestimate the extent to which capitalists believe in their ideology of austerity for the many in order to secure the greatest short-term profits for the few.

So as the economic crisis continues, the question of who pays becomes ever more important, and Federal retrenchment in funding basic state functions amounts to a shift of the taxation burden on to people who can least afford it. As unfair as Federal taxes are, especially after the Bush tax policies recently continued by the Administration and the lame-duck Congress, the Federal tax structure still rests heavily on a progressive income tax, and looks all the more progressive still in comparison with the state and local tax burden.

If you look at Chris Christie's New Jersey, for instance, you will see that the richest 1% of the state (with annual family incomes of $732,000 or greater) pays an average of 7.4% of its income in state and local taxes after the Federal offset. If you are in the middle fifth (family incomes between $41,000 and $69,000), you pay 8.6% on average. For the poorest 20% of the people (family income less than $21,000), the percentage is 10.7%.

And New Jersey has one of the least regressive state and local tax regimes. The state has a progressive income tax, for instance. But the poorer you are, the more likely you are to live in an area with a low tax base, which means that your local taxes are going to have to be higher to fund basic services at the local level, which are receiving less help from the states in the same way (and for many of the same reasons) that the states are receiving less help from the Federal government. The worst aspect of this, of course, is at the school district level: For fifty years this has been the primary area of reproduction for white supremacy, with affluent whites walling themselves up in their rotten-borough school districts, jealously guarding their resources in the manner of a fortified settlement in Hebron.

As bad as the New Jersey example is, state and local taxes in other states are even worse. Neighboring Pennsylvania, for instance, has a flat income tax, and also relies heavily on regressive sales and excise taxes. If you're in the top 1% with family incomes over $428,000 a year, you pay on average less than 4% of your income in state and local taxes. If you're in the bottom fifth, with income under $19,000, you pay on average 11.2%.

Clearly the rich are winning the fight over the question of who pays. The answer is that the rest of us pay, in the form of reduced services, higher taxes for the majority, or both. How can we begin to fight our way out of this?

What Not to Do

Governors in every state are rolling out the austerity programs, and it is a bipartisan affair. We ignore the differences between the two parties at our own peril, especially at the Federal level, as I have noted. But at the state level, while the attack is going to be spearheaded by the Chris Christies, Nikki Haleys and Tom Corbetts, the Andrew Cuomos and the Jerry Browns are not going to be far behind. Even if a socialist were governor of some state, we would be severely circumscribed in our possible choices. We need people in the streets demanding a different way of doing things. Where can we start? Well, let's first look at a few places where we can't start.

In much of the country, the attack on public services is accompanied by an attack on public sector unions, especially on workers' pensions. The shortfall in US public pension funds is esimated at $2.5 trillion, a potential crisis that would not be as bad as it is if governments had properly funded pensions in better economic times, and if the investments of pension funds had not themselves fallen victim to the consequences of Wall Street's irresponsibility.

The idea that public-sector workers are responsible for state and local governments' financial woes is simply preposterous: States with little to no public-sector collective bargaining are also facing major budget problems. But that is not really the point. In especially hard economic times, it is easy for the enemies of the working class to drive a wedge between the hurting majority on the one hand and public-sector workers with good benefits on the other (even if those benefits have been won at the cost of wage increases for years or even decades). For Scott Walker in Wisconsin, "public employees are the haves and taxpayers who foot the bills are the have-nots." This is a lie, but like all effective lies it is half-true, and Walker scored points with it.

The big battalions of the public-sector unions are a necessary part of the fight. These workers do the work every day, they understand its importance and they are directly affected by cuts. But they need to couch their demands in the form of a defense of public services if they are to have any prayer of success. By and large the public-sector unions understand this, even if they have done a poor job of coordinating, getting the message out, and organizing alongside others who will be affected by cuts.

But even the best public-sector union fightback is not going to cut it this year, even in states outside the South where public-sector unions are a factor in politics.

This is because no fight to maintain services will win public support unless we start addressing the question of "who pays." The right wing is going to scream about the danger of tax increases. And they are going to make headway in this, even among many people who need better basic public services, because while the right wing is wrong in aggregate about high taxes (taxes in the US on the whole are low), in light of the lived experience of most people, it rings true. As we have seen, taxes at the state and local level are grossly unfair, and most people are paying more than what they ought to be paying. Republican scaremongering about a tax increase works with many of them, even in cases where the Republicans are really trying to protect an affluent minority from a tax increase, because people will not look at the details absent a serious program of mass education, and they immediately think that tax increases are aimed at them.

We can't continue to defend individual services for poor and working-class people by mounting a militant defense of one service which eventually "wins" by taking money away from another important service: transit vs. education vs. health care vs. environmental clean-up, for instance. How many times have we, as advocates and organizers, found ourselves in situations like these? Similarly, we can no longer expect to fund services with revenues derived primarily from the people who can least afford it. Think back to one of the earliest victories of the Obama Administration: Before the battle over health care, we won an extension and expansion of children's health insurance (SCHIP), a measure that had been twice vetoed under Bush. But it was funded by a regressive excise tax on cigarettes. Very soon, the tendency for state governments to tax cigarettes and alcohol, or to legalize some other form of gambling and tax the proceeds, is going to reach a point of rapidly-diminishing returns, if it hasn't already.

Make the Rich Pay

There is no avoiding the need to make the rich pay. Raising the demand to the point where it even gets a hearing is not going to be easy. But the two-point proposal (1) We need these services and (2) Here's where the money is going to come from is the only way to win real improvements for the people. This demand has been too long delayed, and we continue to ignore it at our peril.

In each state and local area, leaders need to identify ways to take some of the loot back from the hoarding rich, and we need to start organizing and mobilizing people to make this demand. This is going to differ from place to place. In Pennsylvania, for instance, there is still no extraction tax on the natural gas that drilling companies are taking from the Marcellus Shale through fracking; as of this writing, the failure to enact this tax has cost the state $128 million. The Republican governor and legislature -- all of them recipients of the industry's campaign contributions -- are not planning to move on this any time soon, even though two-thirds of the state's people support a tax. To win will require mobilization among the progressive base in the cities as well as in the Appalachian rural areas -- mostly dominated by Republicans -- where most of the drilling is going on. The money raised from an extraction tax will still not plug the state's budget hole, but it is a start. Some opportunity like this must exist no matter where you are in the country.

Once local- and state-based tax-the-rich movements are up and running, they will need to link up in the middle of the year, and make the organized demand for more Federal aid to the states.

This is a very tall order. That I am even suggesting this as a strategy may sound like music to the ears of leftists who are accustomed to making militant demands and not winning anything, but it sounds downright utopian to leftists and progressives in mass organizations and advocacy groups who are focused on the day-to-day and the defensive struggles that predominate in a conservative age. But now is not the time to say that "now is not the time." We either start raising these demands now, or we never will. We have some cause for hope in the discontent at the base provoked by the tax deal between the White House and Senate Republicans at the end of last year. MoveOn, union leaders, liberal TV talking heads -- all of them among the president's strongest supporters -- were angered by the massive giveaway to the rich, and the rank-and-file reponse of the Democratic faithful was real. Eventually, even many of the more progressive-minded members of Congress -- such as Sen. Sherrod Brown of Ohio -- voted for the package out of desperation that the unemployed not be harmed further. But many other Democratic members of Congress rejected it from the left, and their votes reflected real sentiment at the base.

It is up to the left to organize that base, get people in the streets in creative protest, and thereby change the rules of the game. Right now we are far behind. If we don't act to change this, and quickly, then we have as good as given up.


bruce b. said...

This has a lot of good information and makes good points. Thanks in particular to the link to the ITEP report on state/local tax burden distribution.

Some comments and questions:

1) your one concrete example, the hydro-fracking tax in Pa, is problematic, as it encourages dependency on this dangerous extraction technology and will put people at odds with the environmental movement. In NY we had a "millionaires surtax" but it is on the way out. I wonder what other examples would be?

2) no mention at all of the vicious attack on teachers by the "education reformers", many claiming to be progressives. This is a central pillar of the whole ideological offensive and one that many centrists as well as the Obama administration are going along with.

3) why the "in your face" pseudonym? do you really want to discourage people to the left of center (or even centrists who might agree with you) like myself from linking to this posting? obviously it's an in-group joke but it guarantees that if your postings ever gain substantial readership, you have given your opponents unnecessary ammunition.

Felix Dzerzhinsky said...

In answer to bruce b.'s questions:

(1) The battle against fracking in Pennsylvania has been fought and lost, and environmental organizations recognize this unfortunate fact. We are in no position to stop the practice altogether, although there is plenty of NIMBYistic resistance in the affected communities. But environmental organizations see an extraction tax as an important secondary win, especially if some of the proceeds of the tax can be allotted for dealing with the consequences of the industry. Understand that even winning the tax is going to be difficult with the current legislature and governor; it is a very heavy lift. But the alternative is that the companies get to dig this resource out of the earth for nothing, as they've done with natural resources in Appalachia for over a hundred years.

(2) This article was already quite long, so I made some choices about what to include. One thing I didn't add was the way Republicans see Chris Christie as a national leader because of the way he has belligerently attacked public sector workers in general and teachers in particular. North Carolina's right-wing Rep. Patrick McHenry expresses admiration for Christie after having seen a video where Christie tells a teacher she can just go find another job. The attack on public education (in keeping with what I've said about how public sector unions should talk about this, I wouldn't call it just an "attack on teachers") is an entering wedge for the enemy. In Pennsylvania, the first thing on the agenda for the Republican Senate -- SB 1 -- is a vouchers proposal.

There is some cause for hope in the resistance of the communities that are going to be primarily victimized by all of this. As you correctly observe, many so-called "progressives" are on the anti-public education bandwagon exemplified by the duplicitous film Waiting for Superman, and the attack is being carried out in the name of the poorest communities whose schools will be harmed the most by it. But it was both gratifying and instructive that the awful Michelle Rhee -- the darling of the Washington, DC establishment in both parties, including the president himself -- saw her sponsors defeated in the DC mayoral primary. This was a grassroots black voter revolt against her education policies. We need more of this sort of thing, and teachers' unions should take note of who their allies are.

(3) I won't go into detail about how I chose the pseudonym, which predates by involvement with this blog and started with my own blog centered on local issues. It should suffice to point out that Iron Felix is one of Poland's most important revolutionaries, and that he also represents tenacity in finding out what the bad guys are up to and bringing them to heel. (There is a Trotskyite blogger in Britain who calls himself "Lenin," which is just as pugnacious, and he has a relatively large readership.) You're right that in some respects it may limit the audience, though I also think it serves to open more space: the idea is that if open (I guess you might say "in your face") communists can comment intelligently on live issues, marshaling the facts at our disposal, then we gain some legitimacy in political life, showing that we are thoughtful participants in politics and not just adherents of dogma and jargon. In the tiny political blogosphere where I actually live, I have a recognized presence with this same pseudonym, and red-baiting -- which would be a problem even with another pseudonym -- can be undermined when you ask people to deal with the arguments on their merits. This is the niche I've decided to fill in blogging, though I don't think all leftist bloggers should follow this example. You could be right that it may not work; it is something of an experiment.

Felix Dzerzhinsky said...

Today's Wall Street Journal has a story on the woes in the municipal bonds market. (You can use the same Google trick I described above to read the whole thing online, if you can't get your hands on a print copy.) It lists some of the reasons for the current selloffs of muni bonds, in addition to the obvious culprits of reduced state revenues because of the larger economy and the pullback in Federal relief for the states.

For one, there is a rally in the stock market at the moment, which attracts investors away from munis (not to mention Treasury bonds as well). And very few municipal bonds are insured now, the way they were a few years ago; this is a byproduct of the collapse in insurance on all sorts of securities, as exemplified by AIG. But the article also lists another source of difficulty for munis, which demonstrates how rightward-moving Federal policy has even an indirect effect on state and local government finances: because the Bush tax cuts for the wealthy were kept in place by December's tax deal, the wealthy have less incentive to go to munis as a way to get a tax write-off. So not only do the states suffer directly as the Federal government pulls back aid to pay for rich people's tax cuts; they also suffer indirectly from the same policies, since state and local borrowing costs go up as muni-bond investors can afford to demand higher prices.

Overall, the analysts interviewed by the WSJ believe that the alarmist predictions of Meredith Whitney are overblown: one of them says that "The near-term budget problems of states are difficult, painful, but survivable," and that therefore a rash of defaults is unlikely. This measured estimation of state and local long-term obligations to bondholders is reasonable, but such reasonableness among Wall Street analysts disappears when it comes to state and local long-term obligations to workers in the form of pensions.

Yet the WSJ has the graphic evidence right there to prove that public-sector workers' unions have little to do with the crisis. There is an instructive map accompanying the article, which color-codes the states based on bond spreads: the higher the spread, the more perceived risk. Unsurprisingly, the bond spreads track the greatest budget woes that have been making the biggest headlines; at the top of the list are Illinois, California, New Jersey, Rhode Island, Nevada, and of course Michigan, which in the current economic crisis has only extended its long-running record as the most violently-abused state in the country. But down the list from that marquee lineup, there's not much of a pattern at all. There is a line of Deep South states -- Florida, Alabama, Mississippi, Louisiana, all of which are right-to-work-for-less states and not union-friendly -- which are in the middle range of risk alongside New York, Ohio, and Wisconsin. The anti-union Carolinas, Georgia and Tenessee may look less risky, but so do Vermont, Maine, Pennsylvania and Minnesota.

ethan young said...

This is what the dr. ordered, so I'm posting it to Brecht Forum's Economy Watch blog. Please take a look - your feedback would help.

Anonymous said...

This was reposted over at Kasamaproject.org and there is a lively, if critical, discussion of it taking place there.

Felix Dzerzhinsky said...

I had seen the re-post at Kasama, though I wish more people would discuss it here, because at least the people discussing it here have actually read it.

Felix Dzerzhinsky said...

The attack on public sector unions takes an especially vicious turn in Wisconsin.