Thanks a Lot

I am frankly one of those “rich” people whom Republicans steadfastly defend against higher taxes. Well, thanks a lot, fellas – that intransigence on taxes is actually costing me far more in my investment portfolio than any conceivable tax rise would cost me!

In a nutshell, by stonewalling any tax revenue increase, these short-sighted Republican zealots are ensuring American economic weakness for years to come. Again, that will cost me more on my investments than higher taxes might cost me. I’ve lost a ton of money already, in the last couple of weeks, because of this.

The GOP is right that, all else equal, higher taxes are a drag on the economy. But all else isn’t equal. An even bigger drag on the economy is the government’s inability to get a grip on deficits and debt. Increasing revenues is unavoidably part of the needed fix. Republicans are unrealistic to insist on solving the problem through spending cuts alone. Moreover, so long as they refuse to budge on their sacred cow of taxes, Democrats won’t budge on their own sacred cows of Social Security and health care entitlements, which is where any serious spending curbs will have to be found. Only by bending on taxes can Republicans actually achieve the spending cuts they claim to want.

Likewise, Democrats are living in a dreamworld if they imagine they can indefinitely preserve bloated social spending, with exploding costs as the population ages, while the economy remains weak in direct consequence of those exploding costs. Only by sensibly agreeing to trim entitlements now can they hope to avert a huge entitlement smash-up later.

In sum, both parties would better serve the interests of their constituencies if they made a serious “grand bargain” that would lay the foundation for a stronger economy. As Tom Friedman said in a recent column, just the announcement of real negotiations on that basis would send the Dow skyrocketing by 1223 points (which would pay for my increased tax bill for years to come).

In contrast, Paul Krugman believes the financial markets are saying, “We’re not worried about the deficit! We’re worried about the weak economy!” He’s wrong. What the markets have been saying lately is “We’re worried that failure to deal with the deficit will keep the economy weak!”

Top: Federal spending, 2000-2020; blue line is without debt deal; yellow line assumes the full $2.4 trillion in cuts. Bottom: spending as a share of GDP, 2000-2020

The markets fell after the recent deal because they realized it wouldn’t really cut deficits. It doesn’t enact spending cuts; it merely promises to do so. (Just like the phony promise to cut Medicare that enabled Obama to falsely claim his health care law would save money.)

Then there is the “super committee” of 12 tasked with agreeing another $1.2 trillion in deficit reduction (over 10 years), or else automatic draconian spending cuts will be triggered. So the Republicans have appointed to the committee 6 hard-line anti-taxers, and the Dems appointed 6 hard-line entitlement defenders. Does that mean they’ll fail to agree, triggering the automatic cuts? Ha ha, you still don’t get it. What it means is that either they’ll come up with yet another phony deal, or, if not, that Congress will wiggle out of the supposed automatic cuts (which would not take effect for another year).

Japan has suffered two decades of lost economic growth because its politicians would not bite any bullets. America is headed down the same path.

I think most U.S. politicians understand this. But they’re trapped by the system. The real fault lies with voters, who don’t understand. The problem in democracy is that voters get what they vote for. Republicans vote against higher taxes; Democrats to preserve entitlements; and in so doing, all are voting for America to become Japan.



3 Responses to “Thanks a Lot”

  1. Lee Says:

    Interesting. We agree that the market turmoil is not the market’s way of showing its concern about our US credit rating.

    [FSR: I don’t agree that the downgrade is no factor at all; however, it is more a symptom than a cause of the problem.]

    However, we do not agree about whether the market is worried that the budget deal fails to deliver the needed stimulus or whether the market is worried that the budget deal fails to deliver the needed budget cuts. Could it be that the market is worried about both? That is, maybe we’re not spending enough in certain stimulative categories but we continue to spend too much in certain non-stimulative categories?

    [FSR: I think the market is increasingly convinced that Keynes was not God, and that regardless of theory, in practice government efforts to stimulate the economy tend not to work well. The 2009 U.S. so-called stimulus is certainly a case in point. It is at least an open question whether the limited economic benefit from it exceeds the economic harm in terms of digging our debt hole deeper. I think the market is basically worried that we have an economic illness that — for whatever reasons, take your pick — government lacks the capability to rectify.]

    A bit of evidence: the federal reserve announced that it would keep interest rates near 0% for two more years. I venture that such action is stimulative and that since the market responded briefly by going up sharply, this is an indication that, at least in part, the market is worried that the new budget deal is not sufficiently stimulative.

    [FSR: Market said: “Interest rates low — good! Buy!” Then on second thought: “Uh-oh, Fed is doing this because it thinks the economy sucks — bad! Sell!”]

    A second bit of evidence: inflation is very low right now. Over stimulation and overspending tend to cause inflation to be too high; don’t you agree?

    [FSR: Nobody is worrying over inflation as a problem right now.]

    I would say that Japan lost almost two decades because it waited too long to stimulate its economy, and by the time it was willing to bite bullets, it was locked into a deflationary spiral. Are you arguing otherwise?

    [FSR: Not that our problem is specifically the same as Japan’s. It’s the political will to face reality and do what needs to be done.]

  2. Frederick Jackson Says:

    Your piece is my take too on what has been going on of late. Nicely written. I come to your blog via your wife. I was just “talking” to her (on Goodreads) about my “a***” brother”. What an instance of synchronicity this is to come to your blog and find this! My brother has been a DC policy wonk for some thirty years. He has worked principally on health care and entitlement issues and the national debt. For many years he worked for Pete Peterson. During the late 90s he would send out these (well crafted) “fax alerts” almost weekly on the subject of the deficit and the debt. I remember when 11 years ago I saw him just after the Bush tax cuts were voted in, .I was upset, for I felt that they would vitiate any attempt to deal with the impending entitlement crunch by paying down the debt. Reduced debt servicing costs would help cover a portion of the increased entitlement costs I imagined. But what was his response?: “WHAT DO YOU WANT, BEARD? This was his long time code for a Liberal Democrat. That stopped me in my tracks. Not soon after we stopped speakng to each other altogether. This story of mine underscores your point most dramatically that it is the the entrenched postiions and mind sets of the political parties and their constituencies that is precluding any resolutioin of the crisis.

    [FSR: Good question! A rational optimist is not a Pollyanna, optimistic about everything. I am very much an optimist about the future of humanity as a whole. About American government and politics, not so much. But even as to America, I still think the country has some very great strengths, and the government’s capability for wrecking the country is fortunately somewhat limited. For a fuller view of my basic optimism, you could look at my past blog postings; or, better yet, I am compelled to say, my highly excellent book, The Case for Rational Optimism.]

  3. Frederick Jackson Says:

    …a BEARD. My brother acually developed a pretty good take on “beards” when he was in graduate school at Yale. He actually wrote a very funny take on the beard character. I agree on his take on this, but to join the Republican Know Nothings just to spite them is one more nail in the national coffin as far as I am concerned. Tresonable. .

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