Archive for July 15th, 2010

Economic Realism

Republican House Minority leader John Boehner demonstrated the kind of economic silliness that helped bring us to the point we’re at in this country.   First, he defended Senator Kyl’s claim that tax cuts don’t need to be offset with spending cuts, saying you can’t assume revenues will increase with tax increases.   But you also can’t assume that revenues will increase with tax cuts.   It can happen, and if the economy is growing it often does.  But when the economy is in deep trouble to say “I know the answer, let’s just cut taxes” is a horrid form of populist illogic.   Obviously tax cuts can’t always lead to revenue increases, that would yield a paradoxical notion that no taxes means maximum government revenue.   When they do or don’t increase revenue depends on the circumstances, with a myriad of different factors in play.

However, it was this next statement that really caught my eye — again, defending the Bush tax cuts of 2001:

Listen, there was a surplus here, and if the surplus hadn’t been given back to the American people, guess what would have happened? Congress would have spent every dime of it.” – John Boehner.

Wow.   Does he really think that Congress spent less because of the tax cuts?   Given that during the Bush Administration every budget was in deficit, and total debt rose from about 55% of GDP to over 70% of GDP, the idea that the public was “given some of the surplus” during those years is insane.   Tax cuts were paid for by borrowing money!   In other words, money wasn’t given back, it was borrowed, meaning we pay interest on it, and countries like China have more power over our destiny.

The lack of economic realism of our political leaders is not limited to any one party.   Many Democrats paint a picture of an economy that just needs to start growing again, and once it does, all will be fine.   Unfortunately, that overlooks deep imbalances in the economy.

The only solution I see to the current crisis is for both political parties to embrace a mix of tax revenue increases and spending cuts.  It can only be done in a bi-partisan manner because no party has, or ever will have, the political power to implement a solution on its own.

Tax restructuring: The current tax system is arguably unfair, allowing numerous deductions by the wealthy while giving no tax burden to those earning little.   This is done through deductions, credits, and other devices that have been patch worked together over decades.   But even the poor don’t necessarily benefit by having no taxes.  Often to understand how to fill out forms and get any refunds they need to pay a tax service.  The service deducts their fee from the refund, and often entices people into a very high interest loan in order to get their refund right away.

One alternative that avoids all this is what is called a fair tax.   Essentially it is a consumption tax with “prebates” to those who earn below the poverty level to assure they do not have to pay taxes.    This kind of tax — though not exactly what is suggested by the advocates linked to above (it would need a higher rate than 23%, and might be made progressive for higher levels of income and consumption) could both increase revenue and generally relieve the tax burden for most middle class taxpayers.

Republicans, of course, will resist the idea that we should increase tax revenue, especially as much of that increase will come from wealthier folk who consume more, but now find various loopholes and legal ways around paying taxes.   To sweeten the pot for them, Democrats must embrace real spending cuts.

Reduce Spending: Both parties should contribute to a commission to analyze the federal budget and prioritize reforms.    I do not think we get our money’s worth from current spending.   But while “waste” is easy to complain about in the abstract, the only way to identify it is to go through programs and really determine if they are doing what we need them to do, and if particular programs are a priority.   This includes infamous “bridges to nowhere,” but also programs that are popular.   Things like raising the retirement age or other entitlement reforms should be on the table.

The President must charge this commission with coming back with prioritized budget cuts of various amounts.    The idea is not that the commission will recommend cuts directly, but say “if we want to cut 50 billion, we’d recommend the cuts come here, for $100 billion add these additional cuts.”   Accountants and calculate the impact over the years, and then the President has the hard job of selling both the American people and those partisans who would defeat anything standing in the way of their agenda that for the sake of the future of the country, these changes must be made.

Balancing the Budget: The mix of tax restructuring and budget cuts should be calculated to yield a balanced budget in a reasonable amount of time.  Given how deep the debt is, it may take awhile to reach.    There could even be a mix of program refunding and tax relief should the economy out perform predictions.

A new economy: Finally, without a new economic identity, the US is destined to lose more ground and become a far less prosperous nation.  For thirty years we’ve lived off debt driven consumption, while production declined.  We let our factories die, we bought the myth that investment and service industries could give us “something for nothing.”   The new economy has to produce, and it has to produce things the world wants.    That means that alongside budget cuts, there may need to be budget enhancements, aimed at helping grow infrastructure.   Businesses need incentives to invest and take risks, and the government can help provide these.    We may not have a comparative advantage in steel, cars, and electronics any more, but we need to produce something.   Just relying on banks, insurance companies and government jobs won’t do it.

I think the focus on alternate forms of energy production is a good one, but certainly there are other high tech products that could be produced.   This isn’t limited to ‘material stuff,’ it can include intellectual property and things not necessarily produced in factories.   However, it can’t be just shuffling around money or creating get rich quick schemes.

To do this, as a culture we have to embrace the need for sacrifice, we have to understand things won’t change quickly, and we’ll have to be willing to work and pull together.     We need economic realism, a willingness to compromise, and a rejection of ideological orthodoxy.   If we think about the founding ideals of this country, and our generally optimistic/pragmatic culture, I think we can create a better future.   Maybe this crisis is in fact a needed push to teach us some humility, move us away from wasteful hyper-consumerism, and get us to recognize that we are part of the world and need to work with others, and not try to run the planet.