Robert B. Reich's Blog, page 152

Why We Should Raise Taxes on the Super-Rich and Lower Them on the Middle Class

My proposal to raise the marginal tax to 70 percent on incomes over $15 million, to 60 percent on incomes between $5 million and $15 million, and to 50 percent on incomes between $500,000 and $5 million, has generated considerable debate. Some progressives think it's pie-in-the-sky. Here, for example, is Andrew Leonard, a staff writer for Salon:

A 70 percent tax bracket for the richest Americans is pure fantasy – even suggesting it represents such a fundamental disconnect with the world as it exists today that it is hard to see why it should be taken seriously. I would be deeply worried about the sanity of a Democratic president who proposed such a thing.

Fantasy? I don't know Mr. Leonard's age but perhaps he could be forgiven for not recalling that between the late 1940s and 1980 America's highest marginal rate averaged above 70 percent. Under Republican President Dwight Eisenhower it was 91 percent. Not until the 1980s did Ronald Reagan slash it to 28 percent. (Many considered Reagan's own proposal a "fantasy" before it was enacted.)

Incidentally, during these years the nation's pre-tax income was far less concentrated at the top than it is now. In the mid-1970s, for example, the top 1 percent got around 9 percent of total income. By 2007, they got 23.5 percent. So if anything, the argument for a higher marginal tax should be even more realistic now than it was during the days when it was taken for granted.

A disconnect with the world as it exists today? That's exactly the point of proposing it. For years progressives have whined that Democratic presidents (Clinton, followed by Obama) compromise with Republicans while Republican presidents (Reagan through W) stand their ground – with the result that the center of political debate has moved steadily rightward. That's the reason the world exists the way it does today. Isn't it about time progressives had the courage of our conviction and got behind what we believe in, in the hope of moving the debate back to where it was?

Would a Democratic president be insane to propose such a thing? Not at all. In fact, polls show an increasing portion of the electorate angry with an insider "establishment" – on Wall Street, in corporate suites, and in Washington – that's been feathering its nest at the public's expense. The Tea Party is but one manifestation of a widening perception that the game is rigged in favor of the rich and powerful.

More importantly, it will soon become evident to most Americans that the only way to reduce the budget deficit, preserve programs deemed essential by the middle class, and not raise taxes on the middle, is to tax the top.

In fact, a Democratic president should propose a major permanent tax reduction on the middle class and working class. I suspect most of the public would find this attractive. But here again, the only way to accomplish this without busting the bank is to raise taxes on the rich.

Republicans have done a masterful job over the last thirty years convincing the public that any tax increase on the top is equivalent to a tax increase on everyone — selling the snake oil of "trickle down economics" and the patent lie that most middle-class people will eventually become millionaires. A Democratic president would do well to rebut these falsehoods by proposing a truly progressive tax.

Will the rich avoid it? Other critics of my proposal say there's no way to have a truly progressive tax because the rich will always find ways to avoid it by means of clever accountants and tax attorneys. But this argument proves too much. Regardless of where the highest marginal tax rate is set, the rich will always manage to reduce what they owe. During the 1950s, when it was 91 percent, they exploited loopholes and deductions that as a practical matter reduced the effective top rate 50 to 60 percent. Yet that's still substantial by today's standards. The lesson is government should aim high, expecting that well-paid accountants will reduce whatever the rich owe.

Besides, the argument that the nation shouldn't impose an obligation on the rich because they can wiggle out of it is an odd one. Taken to its logical extreme it would suggest we allow them to do whatever antisocial act they wish – grand larceny, homicide, or plunder – because they can always manage to avoid responsibility for it.

Some critics worry that if the marginal tax is raised too high, the very rich will simply take their money to a more hospitable jurisdiction. That's surely possible. Some already do. But paying taxes is a central obligation of citizenship. Those who take their money abroad in an effort to avoid paying American taxes should lose their American citizenship.

Finally, there are some who say my proposal doesn't stand a chance because the rich have too much political power. It's true that as income and wealth have moved to the top, political clout has risen to the top as well.

But to succumb to cynicism about the possibility of progressive change because of the power of those at the top is to give up the battle before it's even started. Haven't we had enough of that?

The Obama Budget: And Why the Coming Debate Over Spending Cuts Has Nothing to Do With Reviving the Economy

President Obama has chosen to fight fire with gasoline.

Republicans want America to believe the economy is still lousy because government is too big, and the way to revive the economy is to cut federal spending. Today (Sunday) Republican Speaker John Boehner even refused to rule out a government shut-down if Republicans don't get the spending cuts they want.

Today (Monday) Obama pours gas on the Republican flame by proposing a 2012 federal budget that cuts the federal deficit by $1.1 trillion over 10 years. About $400 billion of this will come from a five-year freeze on non-security discretionary spending – including all sorts of programs for poor and working-class Americans, such as heating assistance to low-income people and community-service block grants. Most of the rest from additional spending cuts, such as grants to states for water treatment plants and other environmental projects and higher interest charges on federal loans to graduate students.

That means the Great Debate starting this week will be set by Republicans: Does Obama cut enough spending? How much more will he have cut in order to appease Republicans? If they don't get the spending cuts they want, will Tea-Party Republicans demand a shut-down?

Framed this way, the debate invites deficit hawks on both sides of the aisle to criticize Democrats and Republicans alike for failing to take on Social Security and Medicare entitlements. Expect Erskine Bowles and Alan Simpson, co-chairs of Obama's deficit commission, to say the President needs to do more. Expect Alice Rivlin and Paul Ryan, respectively former Clinton hawk and current Republican budget hawk, to tout their plan for chopping Medicare.

It's the wrong debate about the wrong thing at the wrong time.

To official Washington it seems like 1995 all over again, when Bill Clinton and Newt Gingrich played a game of chicken over cutting the budget deficit, the hawks warned about the perils of giant deficits, and the 1996 general election loomed over all. Washington politicians and the media know this playbook by heart, so it's natural for them to take on the same roles, make the same arguments, and build up to the same showdown over a government shutdown and a climactic presidential election.

But the 1995 playbook is irrelevant. In 1995 the economy was roaring back to life. The recession of 1991 had been caused (as are most recessions) by the Fed raising interest rates too high to ward off inflation. So reversing course was relatively simple. Alan Greenspan and the Fed cut interest rates.

In 2011 most Americans are still in the throes of the Great Recession, which was caused by the bursting of a giant debt bubble. The Fed can't reverse course by cutting interest rates; rates have been near zero for two years.

Big American companies are sitting on almost $2 trillion of cash because there aren't enough customers to buy additional goods and services. The only people with money are the richest 10 percent whose stock portfolios have been roaring back to life, but their spending isn't enough to spur much additional hiring.

The Republican bromide – cut federal spending – is precisely the wrong response to this ongoing crisis, which is more analogous to the Great Depression than to any recent recession. Herbert Hoover responded the same way between 1929 and 1932. Insufficient spending only deepened the Great Depression.

The best way to revive the economy is not to cut the federal deficit right now. It's to put more money into the pockets of average working families. Not until they start spending again big time will companies begin to hire again big time.

Don't cut the government services they rely on – college loans, home heating oil, community services, and the rest. State and local budget cuts are already causing enough pain.

The most direct way to get more money into their pockets is to expand the Earned Income Tax Credit (a wage subsidy) all the way up through people earning $50,000, and reduce their income taxes to zero. Taxes on incomes between $50,000 and $90,000 should be cut to 10 percent; between $90,000 and $150,000 to 20 percent; between $150,000 and $250,000 to 30 percent.

And exempt the first $20,000 of income from payroll taxes.

Make up the revenues by increasing taxes on incomes between $250,000 to $500,000 to 40 percent; between $500,000 and $5 million, to 50 percent; between $5 million and $15 million, to 60 percent; and anything over $15 million, to 70 percent.

And raise the ceiling on the portion of income subject to payroll taxes to $500,000.

It's called progressive taxation.

The lion's share of America's income and wealth is at the top. Taxing the very rich won't hurt the economy. They spend a much smaller portion of their incomes than everyone else.

Sure – take some steps to cut federal spending over the longer term. Cut the bloated defense budget. Tame the growth in healthcare costs by allowing the federal government to use its bargaining clout — as the nation's biggest purchaser of drugs and hospital services under Medicare and Medicaid and the Veterans Administration – to get low prices. While we're at it, cut agricultural subsidies.

But don't believe for a moment that federal spending cuts anytime soon will get the economy growing soon. They'll have the opposite effect because they'll reduce total demand.

The progressive tax system I've outlined will get the economy growing again. This, in turn, will bring down the ratio of the debt as a proportion of the total economy — the only yardstick of fiscal prudence that counts.

But we can't get to this point – or even to have a debate about it – if Obama allows Republicans to frame the debate as how much federal spending can be cut and how to shrink the deficit.

The President has to reframe the debate around the necessity of average families having enough to spend to get the economy moving again. He needs to remind America this is not 1995 but 2011 — and we're still in a jobs crisis brought on by the bursting of a giant debt bubble and the implosion of total demand.

Why the Coming Debate Over Spending Cuts Has Nothing to Do With Reviving the Economy

President Obama has chosen to fight fire with gasoline.

Republicans want America to believe the economy is still lousy because government is too big, and the way to revive the economy is to cut federal spending. Today (Sunday) Republican Speaker John Boehner even refused to rule out a government shut-down if Republicans don't get the spending cuts they want.

Tomorrow (Monday) Obama pours gas on the Republican flame by proposing a 2012 federal budget that cuts the federal deficit by $1.1 trillion over 10 years. About $400 billion of this will come from a five-year freeze on non-security discretionary spending – including all sorts of programs for poor and working-class Americans, such as heating assistance to low-income people. Most of the rest from additional spending cuts.

That means the Great Debate that starts this week will be set by Republicans: Does Obama cut enough spending? How much more will he have cut in order to appease Republicans? If they don't get the spending cuts they want, will Tea-Party Republicans demand a shut-down?

Framed this way, the debate invites deficit hawks on both sides of the aisle to criticize Democrats and Republicans alike for failing to take on Social Security and Medicare entitlements. Expect Erskine Bowles and Alan Simpson, co-chairs of Obama's deficit commission, to say the President needs to do more. Expect Alice Rivlin and Paul Ryan, respectively former Clinton hawk and current Republican budget hawk, to tout their plan for chopping Medicare.

It's the wrong debate about the wrong thing at the wrong time.

To official Washington it seems like the 1995 playbook all over again, when Bill Clinton and Newt Gingrich played a game of chicken over cutting the budget deficit, the hawks warned about the perils of giant deficits, and the 1996 general election loomed over all of it. Washington politicians and the media know this playbook, so it's natural for them to take on the same roles, make the same arguments, and build up to the same showdown over a government shutdown and a climactic presidential election.

But the 1995 playbook is irrelevant. In 1995 the economy was roaring back to life. The recession of 1991 had been caused (as are most recessions) by the Fed raising interest rates too high to ward off inflation. So reversing course was relatively simple. Alan Greenspan and the Fed cut interest rates.

This is 2011 and most Americans are still in the throes of the Great Recession, which was caused by the bursting of a giant debt bubble. The Fed can't reverse course by cutting interest rates; rates have been near zero for two years.

Big American companies are sitting on almost $2 trillion of cash because there aren't enough customers to buy additional goods and services. The only people with money are the richest 10 percent whose stock portfolios have been roaring back to life, but their spending isn't enough to spur much additional hiring.

The Republican bromide – cut federal spending – is precisely the wrong response to this ongoing crisis, which is more analogous to the Great Depression than to any recent recession. Herbert Hoover responded the same way between 1929 and 1932. Insufficient spending only deepened the Great Depression.

The best way to revive the economy is not to cut the federal deficit right now. It's to put more money into the pockets of average working families. Not until they start spending again big time will companies begin to hire again big time.

Don't cut the government services they rely on – help with college loans for their kids, help affording home heating oil, and the rest. State and local budget cuts are already causing enough pain.

The most direct way to get more money into their pockets is to expand the Earned Income Tax Credit (a wage subsidy) all the way up through people earning $50,000, and reduce their income taxes to zero. Taxes on incomes between $50,000 and $90,000 should be cut to 10 percent; between $90,000 and $150,000 to 20 percent; between $150,000 and $250,000 to 30 percent.

And exempt the first $20,000 of income from payroll taxes.

Make up the revenues by increasing taxes on incomes between $250,000 to $500,000 to 40 percent; between $500,000 and $5 million, to 50 percent; between $5 million and $15 million, to 60 percent; and anything over $15 million, to 70 percent.

And raise the ceiling on the portion of income subject to payroll taxes to $500,000.

The lion's share of America's income and wealth is at the top. Taxing the very rich won't hurt the economy. They spend a much smaller portion of their incomes than everyone else.

Sure – take some steps to cut federal spending over the longer term. Cut the bloated defense budget. Tame the growth in healthcare costs by allowing the federal government to use its bargaining clout — as the nation's biggest purchaser of drugs and hospital services under Medicare and Medicaid and the Veterans Administration – to get low prices. While we're at it, cut agricultural subsidies.

But don't believe for a moment that federal spending cuts anytime soon will get the economy growing soon. They'll have the opposite effect because they'll reduce total demand.

The progressive tax system I've outlined will get the economy growing again. This, in turn, will bring down the ratio of the debt as a proportion of the total economy — the only yardstick of fiscal prudence that counts.

But we can't get to this point – or even to have a debate about it – if Obama allows Republicans to frame the debate as how much federal spending can be cut and how to shrink the deficit. He has to reframe the debate and remind America this is not 1995.  This is 2011, and we're still in a jobs crisis brought on by the bursting of a giant debt bubble and the implosion of total demand.

Who Says Republicans Have No New Ideas?

Quiz: Which of the 2012 presidential aspirants delivered the following words at the Conservative Political Action Convention, now underway in Washington?

We have seen tax-and-tax spend-and-spend reach a fantastic total greater than in all the previous 170 years of our Republic.

Behind this plush curtain of tax and spend, three sinister spooks or ghosts are mixing poison for the American people. They are the shades of Mussolini, with his bureaucratic fascism; of Karl Marx, and his socialism; and of Lord Keynes, with his perpetual government spending, deficits, and inflation. And we added a new ideology of our own. That is government give-away programs….

If you want to see pure socialism mixed with give-away programs, take a look at socialized medicine.

If you guessed Jim DeMint, you could be forgiven. He talks a lot like this. But you'd be wrong. Newt Gingrich didn't utter these precise words, either, although he uses much the same language and offers the same themes.

You'd also be wrong if you guessed Rick Santorum, Rick Perry, Tom Pawlenty, Ron Paul, Haley Barbour, John Thune, Mitt Romney, or Mitch Daniels. (Sarah Palin isn't attending.)

But again, your mistake would be understandable because these words sound a lot like theirs. Any of them could have delivered this message – and all of them have, over and over again. It's the Republican message of 2011.

The perfectly correct answer is Herbert Hoover.

Herbert Hoover didn't deliver these words at this week's Conservative Political Action Convention, though. He delivered them at the Republican National Convention in Chicago on July 8, 1952.

That was almost sixty years ago.

Republicans haven't come up with a single new idea since. They haven't even come up with a new theme.

Herbert Hoover, you may remember, didn't have a sterling record when it came to the economy. As president, he presided over the Great Crash of 1929 and ushered in the Great Depression. He had no idea for what to do to help the nation out of the Depression except to balance the federal budget. By the time he was voted out of office in 1932, one out of four Americans was unemployed.

By 1952, Hoover had been proven irrelevant and hidebound.

After Dwight D. Eisenhower won the 1952 Republican nomination and went on to become president, he wisely disregarded everything Hoover had advised.

Under Ike, the marginal income tax on America's highest earners was 91 percent. Eisenhower also commenced the biggest infrastructure program in the nation's history – the National Interstate and Defense Highway Act, which replaced America's meandering two-lane roads with 40,000 miles of straight four and six-lane highways. He signed into law the National Defense Education Act, which trained a whole generation of math and science teachers, and upgraded American classrooms for the future. The Federal Housing Authority subsidized home ownership. The Defense Department spawned future technologies in aerospace and telecommunications.

Did the U.S. suffer fascism, socialism, deficits and inflation, as Hoover predicted? No. The U.S. economy soared. The median wage rose faster than ever before. And the incomes of America's working class and poor rose at the fastest pace of all.

Why the Republican Attack on "Job-Killing Regulations" is Dumb

Republicans aim to end all "job-killing regulations" — especially those that, according to House Speaker John Boehner, are "strangling" business with detailed requirements over health, safety, the environment, corporate governance and finance.

Here's another instance of where the White House's attempt to preempt Republican rhetoric (the President said last week his administration would root out all nonsensical and inefficient regulation) ends up legitimizing it — and reframing the public debate around an issue that's hardly central to what ails America.

The reason we have continued sky-high unemployment has nothing to do with excessive regulation. There was no sudden outpouring of federal regulation in 2007 before the economy tanked and millions lost their jobs.

If anything, the economy unraveled because of too little regulation. Wall Street went on a binge, remember? The Street could get almost free money from the Fed (which had reduced interest rates to near zero) and do just about whatever it wanted with it. Thirty years of deregulation, culminating with the dismantling of Glass-Steagall and the abject failure of regulators at the Fed and the SEC to use the authority they still had, enabled the Street to make bundles of money and expose the rest of the economy to unprecedented levels of risk.

The Fed had slashed interest rates in the early 2000s, by the way, because the corporate looting scandals at Enron, Worldcom, Sunbeam, and other major corporations had sapped investor confidence. Those scandals themselves wouldn't have happened had securities regulations been stronger and better enforced.

No one wants unnecessary regulation. And rules ought to be clear and simple. But let's be real. Most of the complexity and verbiage that finds its way into the Code of Federal Regulations is the result of industry lawyers and lobbyists who exploit every potential ambiguity to avoid doing what lawmakers intend — thereby necessitating ever-more detailed and picayune rules to close the loopholes. It's an endless cat-and-mouse game that runs from regulatory agencies through the courts and then back again. And it's occurring right now, as regulations are being drawn up to put the healthcare and financial laws into effect.

There's no necessary tradeoff between regulations and jobs. Regulations that are designed well — that tell industry what to achieve by a certain date but don't dictate exactly how (such as fuel economy standards) — can generate innovation as companies compete to find the most efficient solutions. And innovations can lead to more jobs as they spawn new products and industries.

Even where there is a tradeoff — where regulations are costly and those costs result in fewer jobs — it still makes sense to opt for regulation when the public benefits exceed the costs to industry. We could have millions more jobs tomorrow if we eviscerated all health and safety regulations and allowed our air to turn yellow and our rivers and lakes to become fetid stinkholes. But that would be dumb.

"Job-killing regulations" is a silly phrase that substitutes for real thought. And it's a distraction from the hard work of creating more jobs in America.  

Obama's Deal with the U.S. Chamber of Commerce

"We can, and we must, work together," the President told the U.S. Chamber of Commerce today. "Whatever differences we may have, I know that all of us share a deep, abiding belief in this country, a belief in our people, a belief in the principles that have made America's economy the envy of the world."

Really? I've been watching (and occasionally trying to deal with) the Chamber for years, and all I know is it has a deep, abiding belief in cutting taxes on the wealthy, eroding regulations that constrain Wall Street, cutting back on rules that promote worker health and safety, getting rid of the minimum wage, repealing the new health-care law, fighting unions, cutting back Medicare and Social Security, reducing or eliminating corporate taxes, and, in general, taking the nation back to the days before the New Deal.

So what, exactly, is the deal Obama is pitching to the Chamber?

He said his administration will "help lay the foundation for you to grow and innovate," by eliminating "barriers that make it harder for you to compete - from the tax code to the regulatory system," and by completing more trade deals.

In return, the President said he wants businesses to hire more Americans. "Many of your own economists and salespeople are now forecasting a healthy increase in demand. So I want to encourage you to get in the game," he said. "And as you hire, you know that more Americans working means more sales, greater demand and higher profits for your companies. We can create a virtuous cycle."

Virtuous cycle? American businesses are doing quite nicely as it is. Their profits are soaring. And one reason they're doing so well is they're holding down costs, especially payrolls. So why would they ever agree to add more workers now?

From the standpoint of the nation as a whole more Americans working may mean even higher profits overall. But publicly-traded companies aren't in the business of spending money to help other companies. To the contrary, they're competing with one another to show high quarterly earnings in order to boost their share prices. They'll "get in the game" and begin to hire large numbers of Americans only when it helps their own bottom lines.

And when will that be? Not long ago I debated a conservative economist who argued American workers had priced themselves out of the global labor market and would therefore have to settle for lower real wages and benefits before they'd be hired back in large numbers. By his logic, many health and safety regulations would also have to be compromised or abandoned, since they also make American workers more expensive.

If this is the tacit bargain the President is offering business, it's not a good deal for American workers.

There's no secret to creating lots of jobs by reducing the median wage, slashing benefits, compromising health and safety at the workplace, and, effectively, reducing the standard of living of millions of Americans. We've been doing it for years.

And it doesn't lead to a "virtuous cycle." It leads to the kind of economy we've had for years – including, right now, the most anemic recovery from a deep trough since the mid-1930s. Indeed, when the debt bubble popped in 2008, we discovered how many Americans no longer had the ability to buy enough to keep the economy going. In this and other ways, 2008 bore an uncomfortable resemblance to 1929.

The alternative is to create lots of jobs with high disposable incomes.

In the short term, this means expanding the Earned Income Tax Credit wage subsidy right up through the middle class, and cutting income and payroll taxes for everyone earning less than $80,000 a year – making up the lost revenues by raising the ceiling on Social Security payroll taxes and hiking marginal taxes on the rich.

In the longer term, this means investing in a world-class education for all the nation's kids, including college or high-quality technical education beyond high school. Here again, we'd have to rely on the top 1 percent (who now take home more than 20 percent of all income) to foot the bill.

Might the CEOs and top executives who comprise the U.S. Chamber of Commerce go along with this? After all, they profess to be patriotic. As the President said, they "share a deep, abiding belief in this country, a belief in our people, a belief in the principles that have made America's economy the envy of the world."

I don't mean to sound cynical but I doubt it. 

The Individual Mandate in the Health Care Bill: Why We Should Trade Broccoli and Asparagus for Hot Dogs and Apple Pie

The Republican vote to repeal the new health care law is purely symbolic. But there's one provision of the law that Republicans are likely to try to defund, and they may have the public with them on this. It's the so-called "individual mandate" – the requirement that everyone purchase health insurance, or pay a fine. According to a recent poll, 60 percent of the public opposes it. They just don't like the idea of  government telling them they have to buy something.

The mandate is also particularly vulnerable to legal challenge. So far, two federal judges, one in Virginia and another in Florida, have struck it down. They say the federal government has no more constitutional authority requiring citizens to buy insurance than requiring them to buy and consume broccoli, or asparagus.  The Florida judge referred to broccoli; the Virginia judge to asparagus.

Yet the new system can't work without the individual mandate.  Only if everyone buys insurance can insurers afford to cover people with preexisting conditions, or pay the costs of catastrophic diseases.

The curious thing is Americans don't mind individual mandates when they come in the form of payroll taxes to buy mandatory public insurance. In fact, that's the system we call Social Security and Medicare, and both are so popular politicians dare not touch them.

And no federal judge has struck down Social Security or Medicare as being unconstitutional requirements that Americans buy something. 

Social Security and Medicare aren't broccoli or asparagus. They're as American as hot dogs and apple pie.

So if the individual mandate to buy private health insurance gets struck down by the Supreme Court or killed off by Congress, I'd recommend President Obama immediately propose what he should have proposed in the beginning — universal health care based on Medicare for all, financed by payroll taxes.

The Jobs Report, and America's Two Economies

At a time when corporate profits are through the roof, the Dow is flirting with 12,000, Wall Street paychecks are fat again, and big corporations are sitting on more than $1 trillion in cash, you'd expect jobs be coming back. But you'd be wrong.

The U.S. economy added just 36,000 jobs in January, according to today's report from the Bureau of Labor Statistics. Remember, 125,000 are needed just to keep up with the increase in the population of Americans wanting and needing work. And 300,000 a month are needed — continuously, for five years — if we're to get back to anything like the employment we had before the Great Recession.

In other words, today's employment report should be sending alarm bells all over official Washington. Granted, unusually bad weather may have accounted for some of the reluctance of employers to hire in January. But even considering the weather, the economy is still terribly sick. (Technical note: The official rate of unemployment fell to 9 percent from 9.4 percent, but that's because more workers have left the labor market, too discouraged to continue looking for work. The official rate reflects how many people are actively looking for work.)

We have two economies. The first is in recovery. The second remains in a continuous depression.

The first is a professional, college-educated, high-wage economy centered in New York and Washington, that's living well off of global corporate profits. Corporations continue to make money by selling abroad from their foreign operations while cutting costs (especially labor) here at home. Wall Street is making money by taking the Fed's free money and speculating with it. The richest 10 percent of Americans, holding 90 percent of all financial assets, are riding the wave. And their upscale spending has given high-end retailers and producers a bounce.

The second is most of the rest of America, and it's still struggling with a mountain of debt, declining home prices, and job losses. In coming months most Americans will also be contending with sharply rising prices of food and fuel.

Our representatives in Washington see and hear mostly the first economy. The business press reports mainly on the first economy. Corporate and Wall Street economists are concerned largely with the first economy.

But the second economy will determine our politics in 2012 and beyond.

And not even the first can be sustained permanently on its own. Corporate profits cannot continue to rise on the basis of foreign sales (which are slowing as Europe adopts austerity and China raises interest rates), the purchases of the richest 10 percent of Americans (which are dependent on a rising stock market), and cost-cutting measures at home (which are necessarily limited). Without a strong and broadly-based middle-class recovery, America's big money economy will fall in on itself. A major stock market "correction" is a certainty.

Why the Republican Budget Plan is a Hairball.

The federal budget is $3.8 trillion.

The Republicans have just come up with their plan to cut the federal budget. They've found $32 billion of cuts.

Their fiery campaign rhetoric, fierce determination, righteous indignation, and bloviated anger have summoned forth a hairball.

What happened to John Boehner's $100 billion budget-cutting commitment? What became of Paul Ryan's big ideas? Where did all the roaring and raging on the right during the 2010 election go?

This is embarrassing.

I once had a dog who thought he was the fiercest thing in the county. He wasn't the brightest dog in the world. I brought him to a friend's farm where he spied a large bull far off in the corner of a large field. From that vantage point the bull didn't look very big, so my dog took off after it — howling and yelling to the skies. But as he got closer to the bull, I could see him slowing way down, and his howling turned into a whine. And by the time he came within five feet of the bull he skidded to a stop and turned silent. When the bull looked in his direction, my dog put his tail between his legs and ran.

As Republicans got closer to Social Security, Medicare, national defense, and homeland security, their bark grew quieter and their fierceness turned tail. They discovered the job of tackling the budget will be far bigger and tougher than it looked from the far end of the campaign trail. Americans don't want big spending cuts. They want to cut what doesn't work.

And now congressional Republicans have got to explain this to the Tea Partiers, who are still howling and yelling in the next field.

Stocks Up, Houses Down, And What This Means for Most Americans

Put your ear to the ground and you can almost hear the bulls stampeding. The Dow closed above 12,000 Tuesday for the first time since June 2008. The Dow is up 4 percent this year after increasing 11 percent in 2010. The Standard & Poor 500 is also up 4 percent this year, and the Nasdaq index, up 3.7 percent.

"The U.S. economy is back!" says a prominent Wall Streeter.

Ummm. Not quite.

Corporate earnings remain strong (better-than-expected reports from UPS and Pfizer fueled Tuesday's rally). The Fed's continuing slush pump of money into the financial system is also lifting the animal spirits of Wall Street. Traders like nothing more than speculating with almost-free money. And tumult in the Middle East is pushing more foreign money into the relatively safe and reliable American equities market.

It's simply wonderful, especially if you're among the richest 1 percent of Americans who own more than half of all the shares of stock traded on Wall Street. Hey, you might feel chipper even if you're among the next richest 9 percent, who own 40 percent.

But most Americans own a tiny sliver of the stock market, even including stocks in their 401(k) plans.

What do most Americans own? To the extent they have any significant assets at all, it's their homes.

And the really big story right now – in terms of the lives of most Americans, and the effects on the US economy — isn't Wall Street's bull market. It's Main Street's bear housing market.

According to the Wall Street Journal's latest quarterly survey of housing-market conditions, home prices continue to drop. They've dropped in all of the 28 major metropolitan areas, compared to a year earlier. And remember how awful things were in the housing market a year ago! In fact, the size of the year-to-year price declines is larger than the previous quarter's in all but three of the markets surveyed.

Home prices have dropped most in cities already hard hit by the housing bust – Miami, Orlando, Atlanta, Chicago. But declines increased in other markets that had before escaped most of the downdraft, such as Seattle and Portland.

Things could easily get worse on the housing front because millions of owners are in various stages of foreclosure or seriously delinquent on their mortgages. Millions more owe more than their homes are worth, and, given the downward direction of the housing market, are going to be sorely tempted to just walk away. This means even more foreclosure sales, pushing housing prices down even further.

So don't be fooled. The American economy isn't back. While Wall Street's bull market is making America's rich even richer, most Americans continue to be mired in a worsening housing crisis that the Administration is incapable of stemming, and of which Wall Street has now seemingly washed its hands.