The state of the state - Wisconsin style

There has been much written lately about the current situation in the state of Wisconsin. While some say that the Democrats in the Senate should have come back (or never have left) to do their job, others say that Walker has broken the bargain, being too dictatorial in his refusal to make any compromises. The Democrats have done whatever is necessary to draw attention to this issue, and defend the rights that have been fought for by the state workers for so long, even if it means potentially breaking the law to make that case. A right is being taken from the workers. Some may claim that the workers should not have that right to begin with, but they do, and have had for over 50 years. Adjusting budgets and bargaining for benefits and pay is part of the process, and having that stripped away permanently in order to shore up a short term budget crisis (partially of Walker's own making by giving big corporate tax cuts) is a very serious matter. Even people that voted for Walker in November of 2010 are experiencing a case of "buyer's remorse."

But rather than continue to focus on that specific situation in Madison, I prefer to comment on the much broader perspective on what is ultimately in play. This battle is much bigger than what is going on in Wisconsin. This is why the issue has taken such a big place on the national stage.

It's not about the senators fleeing to avoid a quorum, nor the amount of protesters camping out at the State Capitol that is garnering this level of national interest, but rather the fundamental place that we are at in American Politics.

The bottom line is that 30 years of supply side economics have failed our nation's economic interests. Cutting the tax rates on the top earners does nothing for the economy, other than steer it into the greatest economic downturn since the great depression.

The reason for this is simple. Capitalism starts out great when people have the opportunity to succeed. But over time, the invisible hand of capitalism is guided by a visible hand that ultimately concentrates the wealth into the tiniest corners of society. The reason being that once a certain group of people start making a lot more than the rest, they then use their wealth to gain power and influence in government (such as tax loopholes and subsidies, aka "corporate welfare"), and thus continue to tilt the playing field in their direction.

This results in the perpetual cycle of a smaller and smaller group of people controlling more and more of the nation's wealth. The argument that I am about to make is not a political one of left vs. right, liberal vs. conservative, or even of the haves vs. the have-nots. It is simply an argument of mathematics and basic supply and demand economics.

When the wealth is concentrated into the hands of the few, the middle class simply can no longer afford to purchase the goods and services that they are capable of producing, and that leads to economic stagnation. The demand cannot meet the supply. The demand has to come from the middle class, because the small number of people that control most of the wealth spend only a small percentage of their earnings.

This is where the "supply siders" come in. The idea is that the people at the top will eventually have so much money to invest that they will increase the supply chains by expanding their businesses and hiring more people. Then the demand will be forced to meet up with the supply, and everyone is happy. But the problem is, economies cannot be supply driven. They must be demand driven, and the demand has to come from the people that spend most of their earnings - the middle class. Once the business owners realize that the middle class doesn't have any more money to spend (and cannot borrow any more, after the bursting of credit and then real estate bubbles), it does not take them long to figure out that expanding their businesses would be foolish. The whole "supply side" process then gets stalled, and so does the economy.

Specifically in the case of the state of Wisconsin, cutting working class wages (by increasing the cost of benefits to the workers, and ultimately rescinding their collective bargaining rights) to solve a short term budget crisis is going to do much more damage to the state's economy - and its ability to balance the budget - in the long term.

The damage done by the concentration of wealth into the highest percentile of the population is three-fold:

• not enough revenue flowing into the state to balance the budget
• deterioration of education and other critical services
• creation of speculative bubbles that lead to a variety of market volatility

The first point is an easy one to make. It is self evident that tax cuts cost money. The government has to find ways to provide services and balance the budget - but with a lot less revenue. That is pretty straightforward mathematics. The contrary view is that the tax cuts pay for themselves, in the form of economic stimulus. 30 years of supply side economics have shown us that they do not.

The second point is that sacrificing long term goals (such as educating future generations) for the purpose of solving short term budget gaps is only going to create more crises in the future. It is imperative that we provide quality education for our citizens so that we can compete in a global economy - one in which the world is increasingly handing our asses to us with regards to educating future generations.

The third point is that the ultra wealthy do not spend the extra money they get to keep when they get a huge tax cut. Do they save all that money? No, not in a conventional sense.

The middle class has been duped into thinking that the ultra-wealthy really do spend more when they get a tax cut, and ultimately, that money goes into the general economy, and "trickles down" into the hands of the middle class. But what really happens is that the ultra-wealthy spend only a tiny fraction of their income - with or without the tax cuts.

The reason for that is because, even though $80 an ounce caviar and $350 bottles of wine looks to the average person like a lot of money being spent, in actuality, it really is only a tiny fraction of what the ultra-wealthy keep for themselves. They are spending money like it is going out of style - as fast as they can. But when you are talking about 700 million dollar stock options for a health insurance company CEO, or 1 Billion dollars in fees for a hedge fund manager (who only pays 15% tax on his income because of a loophole that allows him to count those earnings as long-term capital gains, rather than ordinary income), the fact is, no one can really spend that much money.

Never mind the fact that more of the money would get spent if it were divided amongst a larger number of people. (One Billion dollars for one hedge fund manager equals a $50,000 annual salary for 20,000 people.)

The real point is that there is a great deal of unspent money left over, and that money does not get saved either. The money ends up fueling speculative bubbles, which causes bank failures, stock market crashes, and ultimately only serves to create a tremendous amount of market volatility in general.

Is this class warfare? In some ways it is not, but it should be. The billionaires that are gaming the system are pitting the middle class against one another. This results in a disproportionate amount of middle class people voting against their own economic interests. After all, if an economic policy that only benefits the top 1% of wage earners or less is going to be politically viable, it requires that roughly half the population be duped into shooting itself in the foot. As I always say, the self-inflicted wound is always the most painful.

The real solution is for the middle class to unite and stand together. A rising tide lifts all boats, which has been used in the past to claim "when the rich do well, so does everyone else." But in this case the meaning is, when the unions get a good deal, so does the rest of the middle class. Better wages for public union workers and a more reasonable progressive tax structure benefits all working people.

But what if the taxes were raised not just on the wealthy, but on everyone? Still a better deal for the middle class. In the short term, higher taxes means less money in the pocket of the average worker, but in the long run, higher tax rates actually hurt the wealthy more than the middle class. More revenues can be raised, budgets can be balanced, schools, health care and infrastructure can be funded, and middle class wages will actually go up.

Think about it - if you are a private sector employee that is not getting this "sweet pension deal" that the public sector union workers get, who do you have more in common with? The teacher, policeman or firefighter? Or the Wall Street hedge fund manager that makes a billion a year and does not even pay their fair share due to Washington lobbying (aka bribery) that enables them to get special loopholes written into our laws?

It's time for America to choose sides, and that entails defining who is one one side, and who is on the other. It is time for middle class Americans to stop being duped into letting the people at the top game us into fighting amongst each other based on ideological grounds. It's time to look at the real mathematics and economics of the situation and stand together against the big corporations, Wall Street, billion dollar hedge fund managers, and 700 million dollar CEOs.