John Lawrence

                                                                                                P.O. Box 230351

                                                                                                Encinitas, CA 92023

                                                                                                December 7, 1991




President George Bush

The White House

1600 Pennsylvania Ave.

Washington, DC 20500


The Honorable Mikhail Gorbachev

General Secretary of the Communist Party

The Kremlin

Moscow, The Soviet Union


Members of Congress




Christmas Greetings!


Congratulations to Mikhail Gorbachev for winning the Nobel Peace Prize. Now the Soviets must deal with the hard realities of converting their economic system and integrating it with the rest of the worldno simple or easy task and one fraught with danger. The Western World should give assistance for the simple reason that it's in everyone's interests both inside and outside the Soviet Union that it not disintegrate in anarchy and chaos. Stability and order in a country possessing 30,000 nuclear weapons is much to be preferred by the outside world regardless of the internal system of government. There is now a window of opportunity for something resembling a European style democracy—Gorbachev has expressed a preference for Swedish style socialism—but, if this window closes without results, the chances of a return to autocracy and authoritarianism ala Ivan the Terrible, Peter the Great and Joseph Stalin with democratic-capitalist, rather then communist, window dressing and rhetoric looms. Good luck to Mr. Gorbachev, who has done so much in the cause of world peace and ending the Cold War, as he deals with restructuring the economy.


Contrary to popular belief, socialism was not invented by Karl Marx. It has been around a lot longer than that. The Roman Emperor Diocletian in 300 AD had a socialist government. “To overcome depression and prevent revolution he substituted a managed economy for the law of supply and demand. ... He distributed food to the poor at half the market price or free, and undertook extensive public works to appease the unemployed. To ensure the supply of necessaries for the cities and the armies, he brought many branches of industry under complete state control, beginning with the import of grain; he persuaded the ship owners, merchants, and crews engaged in this trade to accept such control in return for governmental guarantee of security in employment and returns._”1


Most socialist governments and movements throughout history were religiously inspired up to the secularization of Karl Marx. In fact the longest running socialist government in history (130 years to the Soviets' 70 years) was established by the Jesuits in Paraguay. “The product of communal labor was turned over to the government; ...most of it was distributed to the twenty thousand families according to their need; presumably some part went to support, on a modest level, the 150 Jesuits who served as directors, overseers, physicians, teachers and priests. A royal decree, suggested by the Jesuits, forbade them to share in the profits of the economy, and required them to render a periodic accounting to their provincial head. ... Each settlement had its own hospital, college, church, and facilities for the old or infirm. It was a theocratic communism: the natives received sustenance, security, peace and a limited cultural life, in return for accepting Christianity and discipline.


“Whence had the Jesuits derived the idea for this remarkable regime? Perhaps in part from More's Utopia (1516), in part from the Gospels, in part from the constitution of their own society, which was itself a communistic isle in an individualistic sea. In any case the system proved popular with the natives; it was established by persuasion without force; it maintained itself for 130 years (c.1620-1750); and when it was attacked from without it defended itself with an ardor that astonished its assailants.”2


The introduction of Protestantism in the 16th century was accompanied by a Peasants' War (1524-1526) by those crying out for the social justice expressed in the Bible newly available in printed form. “The circulation of the New Testament in print was a blow to political as well as to religious orthodoxy. It exposed the compromises that the secular clergy had made with the nature of man and the ways of the world; it revealed the communism of the Apostles, the sympathy of Christ for the poor and oppressed; in these respects the New Testament was for the radicals of this age a veritable Communist Manifesto. Peasant and proletarian alike found in it a divine warrant for dreaming of a utopia where private property would be abolished, and the poor would inherit the earth.”3


Socialism and Communism as well as Capitalism are as old as recorded history. Therefore, when we hear of the collapse of communism we are hearing about the collapse of the Soviet version of it and not the collapse of the longing for a socially just society. Communism and capitalism will probably be around in some form or other for some time to come.


The Collapse of Supply Side Economics


The collapse of communism in the Soviet Union is matched by the collapse of supply side economics in the US which threatens to take down the US version of capitalism with it. The Reagan-Bush Budget Deficits have so bloated the Federal Debt that American taxpayers face the choice of being increasingly burdened with just paying the interest on the debt or keeping taxes low and letting the deficits spiral out of control. Thanks to Reagonomics which brought us the S&L debacle as a direct result of the deregulation of 1981, corporate take-overs that eliminated jobs and then let the debt-ridden corporate shells go bankrupt, looting of corporate pension funds and the cult of greed in addition to tripling Federal debt, the US is in danger of falling to the status of a Third World nation economically.


“According to the administration's figures, the rate of real economic growth in the 1980s was actually slightly less than that in the 1970s—and both lagged far behind the '50s and '60s, when marginal tax rates were high.

“Supply-siders are correct that real output from the end of the 1981-82 recession to the beginning of the current one grew at a sound 3.9 percent average annual rate. What they don't mention is that this rate was less than the 4.1 percent real annual growth for the four-year expansion in the second half of the 1970s.”4


Well. Well. Well. It turns out that the much-maligned Jimmy Carter presided over a greater economic expansion than our beloved Ronald Reagan without tripling the Federal debt by the way. Are apologies in order? Meanwhile, Japanese growth rates were roughly twice this amount.


It turns out that both jobs creation, savings rate and investment in business plants and equipment, contrary to Republican rhetoric, went down in the '80s as compared with previous years. “For the entire 1980s, investment as a share of GNP grew at only half the average annual rate of the three previous decades.”5


And the Reagan tax-cut rhetoric served to obfuscate the fact that while individual income tax rates actually declined, they were more than made up for (for low and middle income Americans) by increased social security or payroll taxes. “…income taxes have covered a steadily dwindling share of the budget: 42 percent in the 1960s, 40 percent in the 1970s, and 38 percent in the 1980s while the top marginal tax rate has also been declining for a generation. By contrast, the share of federal spending that has been paid for by Social Security taxes rose from 18 percent in the 1960s to 28 percent in the 1970s, and its level continued to rise during the supply-side experiment, reaching nearly 30 percent. ... In fact, by the end of the supply-side decade, a working family earning $35,000 was paying 22.1 percent of its income in federal taxes [both individual and Social Security] nearly as great a share as the 25.8 percent tax burden on those in the top 1 percent with incomes of more than $500,000 [who only have to pay Social Security taxes on the first $50,000 of their income].”6


So just what did Reagonomics accomplish? The rich got richer. That's about it. “…while the incomes of tax-burdened middle America were barely rising in the 1980s— up only 3 to 6 percent, after inflation—the nation's richest 1 percent enjoyed real income gains of 75 percent, along with their lower taxes.”7


A Short History of US Debt


The US Federal Debt and Budget Deficit which is annually added to the Federal Debt are out of control and threaten to topple the elaborate edifice of capitalism our forefathers labored so hard to erect. The debt before 1940 was insignificant. In 1940 it was $43 billion. World War II resulted in a huge run-up (by then-prevailing standards) to $259 billion in 1945. So World War II added about $216 billion to the Federal Debt. As late as 1967 the US Federal Debt was $266.6 billion, slightly less than the FY 1991 Federal deficit  of $268 billion.8  In other words in one year, 1991, we've added one whole US Federal Debt circa 1967 to the Federal Debt circa 1990.


The US Federal Debt as of 1979 — through the Carter Administration — was $639.8 billion. Then along came Ronald Reagan whose promised aim was to “get government off our back.” During his two terms in office the Federal Debt more than tripled — to $2.05 trillion — adding about $1.41 trillion to the US Federal Debt. During Reagan's two terms, total Federal spending doubled from $503.5 billion in 1979 to $1.064 trillion in 1988. It seems clear that what Reagan accomplished was not to get government off our back but to get paying for government off our back — at least paying — as — we— go for government. However, Reagonomics, which George Bush labeled Voodoo Economics, the famous supply-side economics armed with the Laffer Curve promised us that by decreasing taxes, resulting in these staggering additions to US Debt, we would so boost the GNP that the deficits would be more than made up by the increased tax revenues from the much expanded future GNPs even at the lower tax rates.


As P.T. Barnum said, “There's a sucker born every minute,” only in this case there were about 250 million suckers that took Reagan at his word. Well, it didn't work, but do you think Reagan will stand up in public and say something like, “Well, shucks, I made a one and a half trillion dollar blunder on this supply side thing and it just didn't work out. All that happened was the rich got richer.” The GNP is going nowhere and the Budget Deficit is projected to rise to $362 billion in FY 1992. The rising tide, that was supposed to lift all boats, lifted the yachts, swamped the sloops of the middle class and dashed the dinghies of the poor on the rocks. Reagan's enduring legacy is not a spurred GNP but a spurned populace that must pay the price for his folly in terms of a permanent addition to the Federal budget each year in the form of increased interest on the US Debt, an amount which must be paid by the American taxpayer in perpetuity.  Because a Budget Deficit of $300 billion adds about $24 billion to the next year's budget in increased interest payments, we have what amounts to an increased, creeping government-on-our-back of the worst kind, one for which we get absolutely nothing in return except the pleasure of seeing investors, many of them foreign, get their stated returns on their investments.


In 1967 Net Interest on the US debt was $10.3 billion, 6.5 % of the total Federal budget for that year of $157.5 billion. By 1979 the interest payment was $42.6 billion or 8.4% of the $503.5 billion Federal budget. By the end of the Reagan administration in 1988, the Net Interest item in the Federal budget was $151.7 billion, about as much as the whole Federal Budget in 1967 and 14.3 % of the total Federal budget of $1064.1 billion for that year. This year, 1991, the Federal government paid about $200 billion in interest on a total budget of $1.4 trillion which is again 14.3%.


Forget the Peace Dividend...Debt Service Has Devoured It


Like the man-eating plant in “Little Shop of Horrors,” who said “Feed me. FEEEED MEEE,” our tax dollars are being increasingly devoured by a Federal debt grown to gargantuan proportions and with a whetted appetite for interest— “Feed me interest. Feed me interest. FEEEED MEEE.”


The new military budget for 1992 has been announced— $270 billion— down from the $300 billion for FY 1991. That's a $30 billion Peace Dividend, right? Wrong. The increased debt service in the FY 1992 budget caused by the Budget Deficit of $268 billion for FY 1991 will be approximately $22 billion. And if the military budget is reduced $30 billion per year, this will nicely counterbalance the successive yearly increases of debt service of about the same amount. Since Bush took over we have added about $628 billion to the Federal Debt and, with a projected $362 billion deficit for FY 1992, Bush will have added about $990 billion to the Federal debt during his first term— almost a trillion dollars— bringing the overall US debt to over $3 trillion. We are paying about 8.3% interest on this debt (for 1991 we paid $200 billion in interest on a total debt as of 1990 of $2410.4 billion). This means we will be paying about $311 billion in interest on the Federal debt by 1996 - more than the military budget of $300 billion in 1991. At the end of a second Bush term with the conservative value of another trillion added to the Federal debt (bringing it to a grand total of $4 trillion in 1996), we will be paying $330 billion a year in interest charges alone. By the year 2000 (assuming another trillion added to the Federal debt between 1996 and 2000) we will have a $5 trillion dollar Federal Debt and a Federal budget item of about $415 billion for debt service rivaling the largest item in the Federal budget— Social Security, Medicaid and Medicare.


Can the Government Do Arithmetic?


“OMB now reports that we can expect $1.082 trillion in deficits over the next 5 years, including the three largest annual deficits in US history. The promise of $500 billion in deficit savings made nine months ago has flipped upside-down and become a threat of $554 billion in added deficits for 1991-1995.”9 How can these continual upwards revisions in the Federal budget be happening? “The budget pact largely exempted so-called mandatory spending programs, which constitute over half of the budget, from the spending restraints, owing to a provision that excludes the effects of biannual ‘technical re-estimates’ and altered economic assumptions.” The most costly recent re-estimates were $64 billion for Medicaid, $39.2 billion in interest on the federal debt and $11.7 billion in unemployment insurance and food stamps.


Entitlements and other mandatory spending have been going up about 10% per year on average in recent history while interest on the Federal debt has been also rising at approximately 10%. But these more or less predictable increases are not figured into the budget agreement with the result that the government is “surprised” every year when they figure the revised budget. “No one in government wants to admit the true cost of runaway entitlement programs and debt service. By exempting technical and economic re-estimates from budgetary discipline, the budget agreement took another step toward eliminating political accountability from the budget process.”10 In other words the US Budget Deficit is out of control.


Reagan-Bush Puts Government “On Our Back”


So rather than getting “government off our back,” the Reagan-Bush era will have actually added a permanent item to the Federal budget that must be paid in perpetuity— about $365 billion in interest— the equivalent of more than another Defense Department. There goes the Peace Dividend! Having placed government on our back in the form of burgeoning deficits needed to pay ever-increasing interest on the US Federal debt, the government increasingly acts as a capital vacuum sucking capital away from productive investment and hence economic growth, the exact reverse of what Reagan-Bush claims to promote.


“Unfortunately for Bush, most of the economy's current problems are rooted in the debt-fueled boom of the 1980s— when he was Ronald Reagan's vice-president. By 1992, the federal debt will surpass the $4-trillion level for the first time in history. Interest on the debt, which now accounts for 14% of federal spending, is the fastest-growing single category in the budget.  And, despite last year's five-year budget agreement, which was supposed to finally bring spending under control, the deficit is expected to hit a record $362 billion in 1992.”11 Emphasis added. Note that this refers to a $4 trillion deficit by 1992 whereas we have mentioned a $3 trillion figure. The discrepancy comes about because the government has an actual surplus of Social Security funds. These funds are used to offset the Federal debt and the interest earned on these funds offsets interest paid on the Federal Debt. Social Security taxes are also used to offset each year's Budget Deficit. In fact there is an ever-increasing reliance on Social Security taxes to offset the relative decline in corporate taxes. In 1980 corporate taxes made up 12.5% of Federal Revenues and Social Security taxes made up 30.5%. By 1990 the figures were 9% for corporate taxes and 37% for Social Security taxes. Thus are tax burdens shifted from the rich to the poor and middle class.


Corporations Get Tax-Free Sleigh Ride


Why are there government deficits not only at the Federal level but the State and Municipal levels as well? One of the prosaic policy items which is sufficiently removed from public perceptions as to be beneath the consciousness level of most Americans is corporate taxation. The Great Reagan Tax Reductions not only applied to wealthy individuals, but, more importantly, to corporations who have been given carte blanche to operate without paying the taxes that used to form the foundation of our tax base. Junk bonds allowed corporate takeover artists to use massive debt to write off enormous amounts of taxes. Federal laws allow companies to take their profits off-shore where taxes are minimal and report their losses in the US thereby minimizing their tax liabilities. States are being played off one against the other by foreign corporations who have placed them in a bidding war for their plant locations with the stakes being the lowest tax liabilities.


“The oversized write-offs mean that foreign-owned companies are more likely than US companies to file a tax return showing little or no profit. This allows them to pay little or no US income tax.

“In 1987, only 41% of foreign-owned companies reported a profit on their US tax returns. By comparison, 55% of US companies showed a profit.

“Revenue of foreign-owned companies in the US rose 50% from 1984 to 1987. Their taxes went up 2%.

“Japanese-controlled companies in this country have done well, both in boosting their sales and in avoiding US income taxes. Their revenue rose 64% from 1984 to 1987, going from $113 billion to $185 billion.

“Yet the federal income taxes paid by these Japanese-controlled companies went down falling 14%, from $1.1 billion in 1984 to $951 million in 1987.

“If you enjoyed the same increase in income that the Japanese companies achieved, your annual salary would have gone from, say, $30,000 to $49,200 in those three years. Simultaneously, the federal income taxes you paid would have dropped from $2,729 to $2,347.

“Residents of foreign countries who buy and sell stocks, bonds and government securities in this country do even better.

“In 1988, residents of Japan collected $8.4 billion from their investments in this country, mostly in interest and dividends. They paid $510.6 million in US income taxes on that money. That is a tax rate of 6.06%.

“By contrast, US workers with incomes between $40,000 and $50,000 paid taxes at an 11.6% rate.”12


An interesting example of this is US Federal government pressure on the states to repeal the unitary tax, a tax on a corporation's output produced within a state regardless of where it is finally sold. In 1985 President Reagan announced that he would support federal legislation to outlaw the unitary tax. Who carried the water for him but then-Senator, now-Governor of California, Pete Wilson, who introduced a bill to bar the unitary tax. Now as Governor of California, himself, Reagan had opposed federal legislation to repeal the unitary tax as “interference by the Federal Government with the states' power to tax...”13 “What seemed to disturb many Californians most about the Reagan-Wilson measure was that it would also have exempted from state taxation 85 percent of the dividends paid US firms by their overseas subsidiaries. ‘Enactment of such a measure would cost the State of California between $500 and $600 million per year in lost corporate revenues,’ estimated a report of the Economic Development Commission.”14 Now as governor, Wilson wonders why the State of California is in such bad fiscal shape, and is in the process of raiding the state workers' pension funds to make up the shortfall, a tactic he learned from the corporate takeover artists of the 80s.


So what can be done to bring the situation under control? Here are some measures:


                        1) A national health insurance plan with strong cost containment features  since a large portion of the increase in the Federal Budget is a result of non-discretionary increases in Medicare and Medicaid;


                        2) Means test entitlements;


                        3) Increase corporate taxes and taxes on the wealthy. 


Each American's share of the $268 billion FY 1991 Federal Deficit was about $1000. That is the amount each individual would have had to pay to wipe out the deficit. That is also the amount that each individual American will be liable for per year in about two years as his or her share of the ongoing, yearly interest payments on the Federal Debt. At some point the chickens are going to come home to roost.


Suppose They Gave a Bond Auction and No One Came


At some point the Government will not be able to refinance and sell its ongoing debt. It won't be the first time that investors have balked at purchasing US Debt. “Treasury officials panicked in May 1987 when foreign investors temporarily declined to bid on the sale of $29 billion in T-bills, needed to finance the deficit. After two days of nervous waiting, the treasury reduced the price of the thirty-year bills and raised their yield, prompting foreigners to return to the market. The Japanese alone bought nearly half the $9.3 billion in thirty-year bonds offered to the public.”15 James Flanagan points out16 that the Japanese enthusiasm for investing in the US is “waning.” He goes on to say that “foreign investors could dump US Treasury bonds — Japan holds about $60 billion worth — and precipitate a crisis in the dollar...” What we're really looking at here is not a stock market crash which brought on the Great Depression but a bond market crash at which time the then dominant powers will probably replace the World Bank and the IMF with world economic institutions dominated by them and place the US in a state of receivership more or less similar to Third World debtor nations like Brazil. Austerity measures would be invoked on the backs of the American people who would then be in a state of economic and hence political vassalage to foreign powers.


Supply Side Economics “Somewhere between a Washout and a Failure” 17


The deficit for 1992, according to the San Diego Union of 11/10/91 will be 5.8% of GNP. So if GNP grew by 5.8% and all the growth was taxed at 100%, then the deficit would be wiped out. However, the GNP has grown at an average rate of a pathetic .3% under Bush. Total Federal revenues have actually been about 19% of GNP for the last 5 years so at that rate the GNP would have to grow by 30%, a ridiculous figure, to cover next year's deficit, at current tax rates, or100 times what growth has actually averaged. So much for supply side economics and the Laffer curve. The fact is that GNP growth will do nothing to decrease the deficit and GNP lack of growth may actually increase it. Government spending is rising at an annual rate of approximately 2% of GNP (largely due to entitlements and not due to discretionary spending) so GNP would have to grow by that amount just to keep the current deficits the same at current tax rates. Obviously, major surgery is required and major increases in Government revenues. New taxes should come at the expense of the folks that got the free rides in the 80s — corporations and the wealthy — and not from individual income taxes on the middle class and the poor.


1. Durant, Will, “The Story of Civilization,” vol. 3, pp. 641-642, Simon and Schuster.

2. Ibid., vol. 7, pp. 249-250.

3. Ibid., vol. 6, p. 382.

4. Shapiro, Robert J., “Weighing Reagonomics,” San Diego Union, 11/10/91

5. Ibid.

6. Ibid.

7. Ibid.

8. “The Economic and Budget Outlook: Fiscal Years 1992-1996,” published by the Congress of the United States, Congressional Budget Office, January 1991. A free publication which any taxpayer can receive with a simple phone call.

9. J. Marc Wheat, David Beers and Jeremy Rosen, “We're losing the war on spending,” San Diego Union, 9/8/91

10. Ibid.

11. “Slow Growth Seen Plaguing Economy for Years to Come,” LA Times, 11/25/91.

12. Barlett, Donald L. and Steele, James B., “Caught in the Crunch: The Shrinking Middle Class,” San Diego Union, 11/18/91.

13. Tolchin, Martin and Susan, “Buying into America,” Times Books, 1988, p. 118.

14. Ibid. p. 119.

15. Ibid., pp. 10-11.

16. LA Times, 11/13/91.

17. “Weighing Reagonomics,” op. cit.