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Once Were Creators

As Obama surrenders, the Rust Belt wonders

The viral video of the moment stars Senator Bernie Sanders of Vermont. He is the white-hair standing at his desk in the US Senate giving a passionate speech, a speech that recites disturbing facts about how different the rich in our country are from everybody else.

At least since the 1980s, progressives have been warning about how much richer America’s rich are getting, and why their self-isolation is a problem for democracy and a sense of a shared national destiny. But the language progressives use to describe this problem is numbing. We are accustomed to hearing about “income polarization,” and “tax regressivity.” But on YouTube, Bernie Sanders makes it simple. He explains how eight out of every 10 new dollars of new income reported in the past 30 years have gone to the richest one percent of Americans. He says that the rich are conducting a “war” on the American middle class, and that America is turning into a banana republic. He is mad as hell that any Democrat would consider extending the Bush administration’s tax cuts for people whose incomes are over $250,000 a year because doing so will add $750 billion to the federal deficit over the next 10 years. Sanders raises his voice against the hypocrisy of Republicans who would cut aid programs for the elderly, the sick, students, and other members of the broke-oisie in the name of ending deficits, but he almost shouts about how repealing the estate tax, as Republicans advocate, will cost the Treasury more than $1 trillion over the next decade, all to benefit the top one-third of one percent of American households. He is contemptuous of Exxon-Mobil’s $19 billion in 2009 profits, on which it paid zero federal income tax.

Sanders gave his speech last week. This week, President Obama, who campaigned vigorously against the Bush program of tax cuts for high-income households, agreed with Republicans to extend precisely the tax policy against which he campaigned.

This move came only a few days after the president’s blue-ribbon commission on the federal deficit produced its report, entitled, melodramatically, “The Moment of Truth.” Not since the 1980s has there been so much elevated and urgent discourse about the federal deficit and the national debt. In the 1980s, America learned that the central claim of Ronald Reagan’s “supply side” policy was a fantasy: Cutting tax rates on high-income individuals and corporations does not result in such great economic expansion that tax revenues lost today are more than made up tomorrow. Arithmetic has proved more reliable than fantasy: When Bill Clinton and the Democratic Congress raised tax rates in 2004, Ronald Reagan’s deficits went away. When Clinton left office in 2000, he left a surplus. When George W. Bush and the Republican Congress did Reagan Redux and cut tax rates but kept on spending, the surplus went away, deficits were created and the national debt mounted.

Now comes the deficit-reduction commission and its surprising report. The headlines have been all about cutting Social Security, squeezing Medicare and eliminating the home-mortgage interest deduction. In reality, it is a genuinely progressive plan.

The 59-page commission report, like Bernie Sanders’s speech, is all about cutting defense spending and taking care of poor people. The commission’s recipe-book includes the most far-reaching tax-reform package anybody has seen since 1986. This “Truth” plan would close almost all tax loopholes on both individuals and companies, and in return, would cut income tax rates. Clinton’s top rate was 36.9 percent. Bush cut it to 35 percent, which Obama, contrary to his campaign promises, accepts. The “Truth” plan would cut the top rate to 24 percent. Interest on municipal bonds wouldn’t be tax-free any more; you’d only be able to deduct your mortgage interest on mortgages under $500,000, which is still very generous given the collapse of real estate in most US metro areas. The only tax breaks that would remain are those for childcare, for some health plans, and for low-income workers. There wouldn’t be any other deductions, exclusions, preferences, or deals available. Capital gains would be taxed just the same as ordinary income, which is the same deal enacted in 1986, only to be gradually done away with. Corporations would lose all their loopholes.

American industry might actually have a chance were this plan adopted. The document has tables that show exactly how much more or less federal income tax would be paid by individuals and corporations. It is a strongly progressive plan, meaning that the effective tax rate of the people Sanders complains about would go up, even though the nominal tax rate would still be a dozen points lower than even George Bush set it. Almost immediately, the incentive for financial speculation, rather than for industrial production, would be curtailed.

The political problem this “Truth” plan has is that most people believe that it would screw old people out of their Social Security. The plan does indeed propose raising the retirement age to 69—but that wouldn’t happen for 40 years. The plan would reduce the benefits of high-income retirees, but it would boost the low-income retiree. It is indeed a progressive plan.

But in the current penumbra of Obama’s capitulation to the anti-progressives in the Republican Party, the commission’s call for progressivity may be just whistling in the darkness.

Hitting home

Sanders complained about shopping for Christmas presents and finding only “China, China, China” stamped on every manufactured item for sale in American stores. We are living the consequences of Richard Nixon’s presidency, for it was he and Henry Kissinger who opened the US to trade with China. High-wage manufacturing jobs in the United States were doomed once Nixon met Mao and began the flood of investment capital to a place where wages are a buck an hour or less.

Today, 40 percent of households in the Buffalo-Niagara metro, according the Internal Revenue Service, make $20,000 or less per year, which is minimum-wage work. In Buffalo-Niagara’s great industrial age, when almost 40 percent of the workforce was engaged in manufacturing, the effective wage rate was more than double that level; median household income was at or slightly below the national average. Not today.

The bipartisan, pro-investor, anti-union, anti-high-wage “free-trade” policy became Bill Clinton’s policy, too. Now it’s Obama’s. And the local consequences of globalization include this: Most of the local dollars we spend on consumption flow out of our region, which is why globalization is a chief reasons that the American Rust Belt has become more and more superfluous.

A new report from the Brookings Institution that reviews 150 metro areas worldwide reaffirms that Buffalo-Niagara is in decline; we rank 40th out of 50 American metros in terms of recovery from the recession. Quibbling about the yardsticks used in reports like these misses the point, which is, sadly, this: The export of American manufacturing has been a disaster for everybody except the financial elite.

The reason our waterfront it available for new use is because it’s no longer economically relevant. Back in the American Century declared by William Henry Luce, the Great Lakes industrial economy—plus a steeply progressive federal income tax whose proceeds bought highways, college degrees for vets, and global economic hegemony—meant our waterfront was where our wealth was created.

We’re still looking for the wealth-creating industries that other former industrial towns now have, especially the ones with pretty waterfronts. San Jose, California was nothing to shout about until the combustion of intellectual property and venture capital created Silicon Valley. Ditto Seattle and Portland. Boston was going nowhere in the 1970s until science and money combined to create innovation, patents, and then all the high-tech jobs of Route 128. The stories of other places are similar: Public money, often through universities or through the military and intelligence services, created great opportunity, and then subsequent to the opportunity, folks needed a place to spend their money, and voila, suddenly old waterfronts and warehouse districts and brownfields became zones of play, redevelopment and vitality. But before the frosting came the cake. In Buffalo and most other places in the Rust Belt, we await the cake.

Vanguard Buffalo

The hard-working and hopeful folks of the Great Lakes Urban Exchange and of the Rust Belt-focused Cities in Transition network are working hard on imagining the next Great Lakes economy. At the conference in Buffalo in 2009, the meetings in Cleveland and Dayton and Youngstown in 2010, and at the upcoming “virtual conference” next week, the focus is the same: We’re wondering what the next industry will be for places that have been exporting their intellectual property the way they used to export cars, planes, metal parts, glass and other manufactured goods that contained our ingenuity inside those finished products. These Rust Belt towns used to be vertically integrated producers: We’d design stuff here, then we’d make it, then we’d market it, and use our ports to ship it. Now, with globalizing speculators running the show and getting every Washington tax incentive imaginable to keep doing so, we do some designing and inventing here in the Rust Belt, but not much making any more, because making things is cheaper overseas.

So the question today is this: How do we get the capital to turn patents and processes and designs created in Buffalo and Detroit and Cleveland and Akron into income-creating, job-producing enterprises in these historic centers of innovation that used to be centers of production, too?

One way to frame the question locally: Should public money for Rust Belt economic development be put into investments that will create wealth- and income-creating industry, or should public money buy the Rust Belt more places to made things made in China? The pending Goldman et al. v. Bass Pro lawsuit against the New York State Power Authority and Empire State Development Corporation is precisely on this issue, because the rules say that public money has to help industry, not retail and commercial development.

While we debate that issue here, Obama just cut a deal that hurts our prospects. Obama ran against the incentives for exporting jobs and for financial speculation, but he has just this week flip-flopped. At the moment, the loudest voice in opposition to that deal belongs to a white-haired senator from Vermont.

“China, China, China,” complains Senator Sanders. “I give up,” says President Obama. Where does that leave the non-investor? Right here is where, in one of those metros that Brookings surveyed, wondering whether the Rust Belt’s dreams of economic renaissance can ever be realized in a place whose waterfront once created wealth. If you ever imagined that Buffalo was a leading-edge metro, wonder no more: Buffalo’s fate may be a preview of America’s.

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