In 1973, a sociologist named James O'Conner offered us a brilliant alternative to the various common explanations of chronic federal deficits and the seeming persistence of fiscal crisis. His Marxist perspective was a refreshing change from the official conservative/liberal debate which focused alternately on popular political pressure leading to excess special interest spending vs. the fiscal need to fill social needs gaps neglected by the free market. O'Conner's analysis actually does incorporate aspects of both arguments while adding quite a few new observations to this issue. What is clear from his conclusions is that those having the mainstream discourse basically miss the point. The fiscal crisis of the state is less about the state itself than about the unequal power relationships and dynamics within the private economy and the various ways in which the state in capitalist society (or the "Kapitalistate" as O'Conner calls it) acts as a stop gap for the crises caused by dysfunctional aspects of the capitalist system. For example, the Kapitalistate sustains the profitability of the economy through fiscal stimulus with the annual funding of billions of dollars worth of "automatic stabilizers" (non-discretionary social spending that supports the economy during a recession) to put a floor under the economy during declines in the business cycle. Such spending also performs a "legitimation function" that garners political support for the system through the support it provides. Mostly, the state acts to manage the externalities created by capitalism by spreading and managing the costs of ensuring maximal private profit making. These functions range from absorbing the costs of cleaning up environmental pollution, to providing income supplements to the working poor (think of Walmart workers that collectively receive millions annually in Medicaid and Food Stamps) to providing infrastructure, security, basic services and guarantees of an educated and healthy workforce. In an epoch of late capitalism national capital becomes globalized by more flexible cross border mobility with the removal of previous capital controls. Thus, its political power increases over national and state governments whose only options in securing jobs and tax base become a "race to the bottom" lowering both wages and taxes. The consequences for labor is lower wages due to less bargaining power. But the consequences for governments is greater dependence on borrowing. This causes growing deficits due to a shrinking tax base. But the growing social need caused by higher average rates of unemployment and lower average income and benefits for workers also increases government spending needs. It is very clear then, that high deficits are not the consequences of more spending by government but by the rising costs of the system's increased profits for the rich and the ever greater concentration of those profits in the hands of fewer and fewer corporate rich enabled by capitalism's heightened cross border mobility.
The Fiscal "Race to the Bottom" in an age of Greater Capital Mobility Just how global is corporate capital. One measure is the total global inward stock of foreign direct investment (FDI) as a share of world GDP. According to the UN Commission on Trade and Development (UNCTAD) the total inward stock of FDI as a share of world GDP increased from 9.7% in 1990 to 34.3% in 2013. This means fully one third of all non-residential gross fixed capital investment is made outside the parent corporation's country of origin. This suggests that capital is highly mobile across borders at the present moment. The top one hundred global corporations by sales revenue have the majority of their employment, sales and assets outside their home countries. In the case of the United States, which now accounts for eighteen of the top one hundred giant global corporations, it has been estimated that these top US corporations account for roughly one sixth of the total assets, over one quarter of the total sales revenue and about a quarter of total employment of all US non-financial multinational corporations. BY 2008, more than half of the assets, employment and sales revenue of these top eighteen US corporations was attributed to their foreign affiliates. According to John Bellamy Foster; "... the majority of these U.S. corporations in the top one hundred multinationals experienced, between 2000 and 2008, substantial (and, in some cases, huge) increases in the share of assets, sales, and employment of their foreign affiliates. To take a few examples, the share of foreign assets, sales, and employment represented by General Electric’s (GE’s) foreign affiliates rose from 36 percent, 38 percent, and 46 percent, respectively, in 2000, to 50 percent, 53 percent, and 53 percent in 2008—making GE primarily a global, as opposed to U.S., producer. For Ford, the share of foreign affiliate assets/sales/employment rose even more dramatically, with foreign affiliate assets climbing from 7 percent to 46 percent of Ford’s total assets between 2000 and 2008, and the sales and employment of its foreign affiliates rising from 30 percent and 53 percent to 59 percent and 58 percent. In 2008, therefore, the Ford parent company accounted for only a little over 40 percent of both sales and employment. A full 86 percent of Coca-Cola’s total workforce in 2008 was employed by its foreign affiliates." The trends suggest that although most production and sales are domestic, a rapidly growing share has been rapidly globalized over the past couple decades. As we shall see, the ongoing globalization of the commanding heights of the largest corporations and the economies in which they are based has increased the political power of capital enormously over time. One example of the failure of the race to the bottom is shown in a 2012 study by a team of New York Times investigative reporters that assembled a nationwide data base of 150,000 tax breaks awarded by several hundred states and localities across the US over the course of the first decade of the 21st century. The study found that the states and localities under investigation lost on average about $80.4 billion a year. The report, which cites many government officials at all levels claiming that such tax breaks and subsidies did little to alter the unemployment and financial picture in their city or state, concluded this; A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States. Over the years, corporations have increasingly exploited that fear, creating a high-stakes bazaar where they pit local officials against one another to get the most lucrative packages. States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors. And this is just the awards studied in the NYT data base; there are many more not covered that would increase the $80 billion per year annual figure. Another more scholarly study by Marilyn M. Rubin of John Jay College and Donald J. Boyd, former director of the Rockefeller Institute of Government State and Local Government Finance, also concludes that little is accomplished by these tax incentives but the shifting of the tax burden from the rich to the working population while few permanent good paying jobs are created. The general conclusion is that the typically concentrated set of tax credits and incentive awards don't pay for themselves. Here is one conclusion from the report, which focuses significantly on New York State; Economic development officials value business tax incentives as tools needed to compete with other states. There is, however, no conclusive evidence from research studies conducted since the mid-1950s to show that business tax incentives have an impact on net economic gains to the states above and beyond the level that would have been attained absent the incentives. In addition, business tax incentives violate principles of good tax policy and tenets of good budgeting. Tax analyst and NYT reporter David Cay Johnston did an analysis of the report, that covers NY State for the year 2013 and concludes this; This year, state government subsidies to corporations, partnerships, and other businesses in New York state alone will total $1.7 billion, triple the giveaways in 2005, according to the new study. That's $235 taken from the average Empire State household this year and redistributed to business owners on the theory that redistribution will create jobs. During those years, the number of jobs in New York declined, the state's official jobs data website shows.2 The total number of New Yorkers employed in 2012 was down 175,000, or 2 percent, compared with 2005. Think of it this way: Over nine years, the state of New York gave businesses roughly $10 billion, or almost $1,400 from each household, in a jobs program that eliminated 175,000 jobs at an average cost of $57,000. And that's just state-level subsidies, not those from industrial development agencies. The general truth of this assessment is confirmed, for example, by the State of Louisiana whereby, according to the LA Times the State of Louisiana actually got less than a third of the jobs anticipated by officials who supported the tax holidays for corporations; "...when Louisiana checked on the 9,379 jobs that were supposed to be created with the help of its enterprise zone incentives in 2009, it found a likely net gain of only 3,000 jobs. That's because many of the projects would have occurred even without the incentives, and because some of the new jobs came at the expense of nearby competing businesses that scaled back or shut down." One CBS Money segment report points out that the current, more intensive, corporate focus on the states for subsidies and tax break award offers follows the expiration of many such tax deals at the federal level in 2013. According to the report of June 2014, about 46 states offered a total of 200 programs of tax credit awards worth billions. It is also usually the case, as one report confirms, that state and local officials find that the cost per job of the tax breaks far exceed the benefits in income and/or tax returns. According to one watchdog group, Good Jobs First (GJF), tax break awards that annually exceed $75 million have doubled since 2008 as have their cost to the growing number of states and localities that award them: according to GJF it came to about $5 billion! Over this period, GJF estimates that the number of jobs actually made by these mostly global companies were so few that the cost per job wasn't worth it. GJF puts the average cost per job at $456,000. The path to economic growth has never really been tax breaks for the rich but fiscal stimulus that creates long term jobs and income growth for workers and their families. The tax break approach isn't economically sound. It just reflects the political power of capital which has shifted millions of jobs overseas, most of them manufacturing jobs, since the late 1970s. Tax Base Erosion, Wage Deceleration and the Rise of Debt. The state under capitalism is an essential component the system's success, not an obstacle or a drain on resources; the Kapitalistate is a handmaiden to capitalism's very survival. Starting from this basic Marxist assumption, O'Connor's crafts a theory of state fiscal crisis that posits two main functions of the state's supportive role for big capital. These two functions come into conflict in the epoch of late capitalism resulting in fiscal crisis. The first function O'Connor calls the accumulation function which supports the investment process through economic stimulus. It further absorbs the costs of externalities created by increased profit making through subsidizing the low wages and poor benefit levels offered by corporations like Walmart with social spending on food stamps and Medicaid. The state also absorbs externalities through its role in cleaning up the environment from industrial pollution, bailing out TBTF corporations (privatize gains, socialize losses); sustaining and expanding infrastructure; subsidizing R&D for technological development and by providing security through policing and the prison system for those late capitalism marginalizes. The second function is the legitimation function which secures the loyalty of the working masses by making the system appear favorable through social safety net spending and by supervising and enforcing the capital/labor accord which protects labor through unions and labor standards laws while guaranteeing labor peace for stable and profitable capital investment. During late capitalism, as capital becomes highly mobile across national borders, global markets begin to exceed in importance local ones making conditions in local society less relevant in the long term. This is one reason the power of capital over society has increased greatly over the past three decades. Thus, the accumulation function increasingly takes precedence over the legitimation function causing endemic fiscal crisis as capital's willingness to tolerate large state expenditures and high taxes to sustain national society declines precipitously. Capital's hyper-mobility has given it the power of the "capital strike" which explains the collapse of corporate income taxes and the decline in various industrial regulations and union protections. One consequence of this trend is the growth of both public and household debt. Real average wage growth, which before 1980 kept pace with labor productivity growth and the growth of the economy in general, has declined over the years; many sources have confirmed the fourfold growth in the income of the top one percent since 1980, while that of the bottom ninety percent have hardly experienced a fifty percent increase over the same period. This brooks no controversy and the consequences have been rising household debt, which by the start of the Great Recession in 2008, equaled total US GDP of well over $13 trillion! Borrowing against financial assets such as stock portfolios and primary residences the value of which was sustained for years by financial bubbles, allowed households to borrow to fill the income gaps left by declining real wages. The disaster that occurred with the financial collapse and the combined loss of over $15 trillion in home values and financial wealth is the consequence of the financialization of the US economy and the risks it created. The growth of private sector debt well exceeded publicly held government debt by far. But public debt is growing all the time as a share of GDP which is fast approaching 75%. The reason is the downward shift in tax liability from corporations to individuals. True the replacement of C-Cprporation organization with S Corporation organization for tax purposes means that much corporate tax contributions are included in the individual contributions as well. But it also means that the federal government loses billions of dollars of income tax revenue as more and more corporations are organized as "pass through" operations for tax purposes to avoid corporate taxes. Bernie Sanders famously cited the decline of corporate contributions to annual federal income tax revenue from 33% in the early 1950s to about 9% currently. Depriving the Federal government of tax base in order to shift greater spending obligations to the states which inherently have less capacity to bear such obligations has been part of the strategy of "starve the beast" conservatives and has greatly contributed to the current state fiscal crisis. This as well as the shift of operations overseas-where over a trillion in profits earned by the foreign affiliates of US corporations remains safe from federal income taxation-has been the leading cause of federal deficits; not spending as a share of GDP which hasn't changed much over the years despite the greater need caused by endemic crisis and recessions. Economist Rick Wolff has pointed out that the rise of public debt is one manner in which the capitalist class "kicks the can" down the road, so to speak in order to avoid taxation. Government borrowing, in lieu of progressive taxation, allows corporations to maximize profits by externalizing the costs on government. In essence, the capitalists prefer to lend money to the government at a rate of interest to meet spending needs instead of having it simply taxed away. Wolff explains that this also postpones the political struggle over taxation between the middle class and the rich which can be quite polarizing. He asserts; In today's class-divided societies, classes differ over what governments should do and who should pay the taxes. Governments in such societies often turn to borrowing -- which produces national debts -- as ways to defer and postpone the political problems of resolving class struggles focused on the state. By borrowing, governments can immediately accommodate -- at least partly -- the different class demands for government spending while postponing the raising of taxes into the future ...Problems arise when lenders to such governments demand much higher interest payments or refuse to lend more. Then rising national debts can no longer postpone resolution of the underlying class struggles...Class struggles deferred often become class struggles sharpened. This becomes clear in struggles over social spending cuts and pension plans for public sector workers the spending for which becomes demonized by capital as the cause for fiscal insolvency though the real cause is tax base erosion by global capital and declining tax revenue from capital's contribution. It is also the case that social spending and public sector wages are stimulants to the overall economy and over time pay for themselves. Big business however, insists on making wages and transfer payments to the poor the culprit for the crisis. Such struggles, as Wolff suggests, sharpen as debts grow and the "deferred social conflicts" become sharper and sharper. This has been seen in many states since the onset of the crisis in 2008. Wolff also explains that government bond debt not only postpones sharpened social conflict by removing the taxation issue allowing government to perform its necessary functions but it also benefits the ruling class because they collect most of the bond interest. In a crisis, US long term bonds are safe investments and often the most profitable considering the low risk. But as Wolff points out, it is not problem free. The chickens ultimately come home to roost and the deferred struggle gets quite sharp especially as workers resist austerity and demand that deficits not be lowered at their expense. Big capital responds by demonizing most of civil society and government while falsely presenting themselves as the "job creators" who should be spared tax increases. Wolff explains that as debts pile up and financial crisis looms, lending to governments no longer appears to be a "win-win" situation, especially as polarizing political conflict intensifies; The moral of the story of class struggles and national debts is this: government borrowing is capitalism's very employer-partisan way out from a political dead end. It rewards lenders nicely, but it only works for a while. Employers who avoid taxes and instead lend to governments eventually encounter the risk of default by over-indebted and politically stalemated governments. Then employers refocus their own and governments' efforts back on the old, underlying class struggles by concerted attacks to reduce government spending on employees while taxing them more. Wolff's brilliant observations seem to be more and more relevant. As fiscal crisis in the various states worsens, struggles between the rich and poor sharpen over wages, pensions and social safety net spending. Class Conflict and the Fiscal Crisis of the States State budget shortfalls are illegal in many states; unlike the federal government, many state constitutions require that states balance their budgets at the end of each fiscal year. Rolling existing debt into the following year has usually been prohibited. Yet beginning with the recession of 2001, certain states began to experience chronic fiscal problems that didn't allow them to balance their budgets. Years of Reaganomics, job loss, lower taxes and tax base erosion and declining average real income and slow growth finally caught up with states that previously prided themselves on sound fiscal management. The problem wasn't excessive spending; per capital real spending increases were never very great in most states. The problem was capital flight despite wage deceleration and billions in state offered tax breaks to corporations that offshored production anyhow. Globalization is a force that took a greater toll on state budgets than state spending. Several deep recessions since 1980 finally created a permanent fiscal crisis at the state level. After the crash/Great Recession of 2008 state deficits began to rapidly increase. According to the CBPP, total cumulative state budget deficits bottomed out in 2010, the year that the US job market began to turn around after losing over 8.5 million jobs in just two years, at an unprecedented $191 billion! According to the above cited CBPP report, the real problem is slow economic growth and low tax revenue collection, not spending. The report cites an average annual growth rate of state tax revenue between 1980 and 2008 of 5% adjusted for inflation. Though state deficits have declined with the recovery (the revenue jump between 2010 and 2011 of 8.3% largely due to emergency federal aid and the job market recovery, brought deficits down fast) they're stuck at higher levels than before the crisis and economists estimate that total balancing of state budgets would take until 2019 assuming an annual average revenue growth of 8.3% which is far from what is expected. The problem with the social spending cuts is that they will worsen deficits, not reduce them. Tea party Republican governors like Scott Walker of Wisconsin and Bruce Rauner of Illinois don't get this point. Since 2011, 46 states made collectively billions in budget cuts that hurt the poorest and most vulnerable. The cost to jobs and the recovery was worsened by the cut off of federal aid made available by ARRA in 2009. According to one CBPP report, despite closing $425 billion in budget gaps by indebted states between 2008 and 2011, mostly through spending cuts rather than tax increases, total state budget shortfalls remain in the tens of billions. Many tea party governors are using the most regressive ways to close stubborn state budget gaps. In Ohio, Republican governor John Kasich proposed a nearly $2.5 billion sales tax increase while cutting the top state tax rates for those earning over $208,500/year from 5.9% to 4.1% making the state tax burden fall even heavier on the poor. Bruce Rauner of Illinois wants to cut $1.5 billion in spending in this fiscal year alone by slashing public sector pension benefits and Medicaid while refusing to raise state income taxes. He has rejected a state Democratic proposal to raise taxes on those with incomes over a million a year. In states such as Louisiana, New Jersey, and Wisconsin, Republican governors want to fill gaps by cutting Medicaid, education funding, pensions benefits and state employment all while refusing to raise taxes on the corporate rich and other wealthy tax payers. Many pundits rightly believe that the GOP will be harmed in the 2016 national elections because of their one sided approach to fiscal recovery that leaves the income of the wealthy alone while causing the working class to suffer the effects of austerity, even at the expense of economic recovery! As Wolff predicted, the fiscal crisis caused by debt financed growth that allowed the rich to globalize their increased profit making opportunities at the expense of national economies has sharpened class conflict at the all levels including the states. The tax cut approach has failed. According to David Cay Johnston, American working families have lost over $48,000 per person in income or collectively $6.6 trillion since the Bush tax cuts in 2001. Over the past decade and a half, this has occurred through slower growth, lower wages and higher average unemployment, public spending cuts that have cost jobs and reductions in the social safety net. This has slowed the recovery and caused needless suffering. In 2012, the State of California addressed its budget crisis with significant income tax increases and in one year closed nearly $7 billion in budget gaps, experienced nearly 3% job growth in 2013 and is set to experience a nine billion operational surplus by 2018 assuming continued job and GDP growth at the state and national levels. Tax cuts for the rich have proven not to work. The reason is that the savings are not reinvested in the local economies, especially when there is shrinking effective consumer demand due to recessions and low and declining average income growth. The roots of the current crisis is not profligate state spending, states have consistently cut their budgets over the past thirty years. Real state budget growth as a share of the economy is not that high (except in times of deep recessions causing unavoidable non-discretionary social spending to skyrocket as growth slows). Tax revenue losses are much greater. Globalization has concentrated income, slowed investment, reduced tax base and caused chronic economic stagnation everywhere. This is the real cause of the current crisis. Only a massive public investment campaign for full employment using trillions of dollars nationwide can reverse the current situation. Millions of green jobs in public transportation, health care, infrastructure spending and energy conservation could lower the cost structure of the US economy and save jobs. But big capital is moving in the opposite direction. Their plan is to further concentrate income and wealth and deepen the inevitable crisis and social polarization.