Wow, we haven’t posted in a while. That’s because it’s now George’s turn to travel the charming, but politically insane Middle East. Yes, your editors are very worldly, etc, except when they plan to spend all weekend playing Starcraft II in their boxers. Am I nerd? The evidence points to it.
ANYWAY, there are times when certain pundits are rigorously and intellectually honest, analyzing social and economic data to find conclusions on where our politics should be. I KNOW! THIS IS UNBELIEVABLE, that such people still exist in our modern punditry, which is 95% full of ignoramuses. (That is not a scientific poll).
Bruce Bartlett was recently interviewed by The Economist, and I’ll be darned if every word the man spoke in that interview was not prescient, true, and backed up by hordes of studies and quality observations. Here’s the link and I’ve made a few comments in bold in a complete re-post below.
T’S difficult to classify Bruce Bartlett politically. He has worked on the staffs of Congressmen Ron Paul and Jack Kemp and Senator Roger Jepsen. He was senior policy analyst in the Reagan White House; and deputy assistant secretary for economic policy at the Treasury Department during the first Bush administration. But he has also written a book titled, “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy“. So you could say that Mr Bartlett’s loyalties are economic, not partisan. Currently Mr Bartlett is a columnist for the Fiscal Times, an online newspaper covering the economy, and he blogs at Capital Gains and Games. He has also written several books, the latest of which is “The New American Economy: The Failure of Reaganomics and a New Way Forward“. We recently asked him some questions about the economy, the deficit, and the chance that America will one day have a VAT.
DiA: Which should be a higher priority for the federal government at the moment, deficit reduction or economic stimulus?
Mr Bartlett: Clearly, economic stimulus. The question is, what can the government do that would, in fact, be stimulative. One argument, popular in Europe, is that fiscal consolidation is stimulative by reducing uncertainty, the fear of future tax increases and inflationary expectations. While I concede that fiscal consolidation can be stimulative under certain circumstances, those circumstances don’t exist in the US today. Basically, we would need a situation in which inflation and/or tight money is the basic problem. Under those conditions, fiscal tightening can lower inflationary expectations, reduce crowding out and give the central bank room to ease monetary policy, thus leading to economic expansion.
However, none of those conditions exist today. The Fed is as easy as it can be given the zero bound for interest rates, deflation rather than inflation is the central economic problem, and there is no evidence that federal borrowing is crowding private borrowers out of the market. There is no need to borrow to finance productive capacity at this time and, in fact, businesses have more than adequate cash on hand to pay for expansion if there were expectations of higher sales to justify it.
Under these circumstances, I think we need some policy that will encourage spending, private borrowing and investment. Since further fiscal stimulus is effectively off the table for political reasons, some other mechanism will have to bring that about. The Federal Reserve is the only institution that can do it; the question is how. There may be scope for quantitative easing, but simply driving longer-term interest rates down further may not be effective given expectations of slow growth and downward pressure on prices. If the Fed could create inflationary expectations, that would help, but it may not have the capacity or credibility to follow through. (Austin: The Senate has held up confirmation of appointees, and Obama has not been applying a lot of visible pressure on getting the Fed positions filled. The earliest we’re looking at for a fully-staffed Federal Reserve Board is late September. That is too long with employment at 9.5 percent.)
My fear is that the US may be in for an extended period of Japan-style stagnation.
DiA: In the longer term, what types of economic and political problems will we be looking at if we allow the deficit to continue growing?
Mr Bartlett: In the near term, the biggest problem the deficit presents is that there is no further scope for fiscal stimulus. We now know that the Obama administration’s economists wanted a stimulus package last year almost twice the size of the one that was enacted—something closer to $1.4 trillion rather than $800 billion. Maybe that would have been enough; we’ll never know. Unfortunately, there was only one bite at the apple and doing more at this point is practically impossible.
But what happens if we have a double-dip next year? Is it realistic to think that any stimulus at all is possible on the fiscal side? Given the likelihood of Republican gains in the November elections and the strong Republican incentive to make the economy as bad as possible going into 2012, I don’t think it would even be possible to pass a stimulus package that was 100% composed of tax cuts—the only stimulus Republicans might support.
I would add that I do disagree with the Republican fixation on taxation. Federal taxes as a share of GDP are at their lowest level in two or more generations—14.9% versus a postwar average of 18.2%. There is not one iota of evidence that the economy is suffering from excessive taxation and no evidence that the sorts of tax cuts favoured by Republicans—mainly tax cuts for the wealthy—would do any good given the nature of the economy’s problems. Tax cuts don’t help those with no incomes because they are unemployed, businesses running at a loss, or investors with a large stock of capital losses. In my view, the Republican obsession with taxes is based on pure dogma, not analysis.
DiA: More generally, which party do you find more credible when discussing America’s fiscal challenges?
Mr Bartlett: The Republicans don’t have any credibility whatsoever. They squandered whatever they had when they enacted a massive UNFUNDED expansion of Medicare in 2003. Yet they had the nerve to complain about Obama’s health plan, WHICH WAS FULLY PAID FOR according to the Congressional Budget Office. The word “chutzpah” is insufficient to describe how utterly indefensible the Republican position is, intellectually.
Furthermore, Republicans have a completely indefensible position on taxes. In their view, deficits cannot arise from tax cuts. No matter how much taxes are cut, no matter how low revenues go as a share of GDP, tax cuts are never a cause of deficits; they result ONLY AND EXCLUSIVELY from spending—and never from spending put in place by Republicans, such as Medicare Part D, TARP, two unfunded wars, bridges to nowhere, etc—but ONLY from Democratic efforts to stimulate growth, help the unemployed, provide health insurance for those without it, etc. (AM: See just a couple posts below. Reagan’s tax cuts permanently bit into revenue and deepened annual deficits. Also see the unbelievable Senate Minority Leader (R) Mitch McConnell claim that tax cuts recoup all revenue lost by increased economic growth. Not even George W. Bush’s economic advisers agree with that. Read this madness.)
The monumental hypocrisy of the Republican Party is something amazing to behold. And their dimwitted accomplices in the tea-party movement are not much better. They know that Republicans, far more than Democrats, are responsible for our fiscal mess, but they won’t say so. And they adamantly refuse to put on the table any meaningful programme that would actually reduce spending. Judging by polls, most of them seem to think that all we have to do is cut foreign aid, which represents well less than 1% of the budget.
Consequently, I have far more hope that Democrats will do what has do be done. The Democratic Party is now the “adult” party in American politics, willing to do what has to be done for the good of the country. The same cannot be said of Republicans, who seem unwilling to do anything that would interfere with their ambition to retake power so that they can reward their lobbyist friends with more give-aways from the public purse.
Unfortunately, I don’t think Democrats have the guts or the stamina to put forward a meaningful deficit-reduction programme because they know—as I do—that it will require higher revenues. But facing big losses in the elections this fall I can’t blame them. That leaves us facing political gridlock between the sensible but cowardly party and the greedy, sociopathic party. Not a pleasant choice for those of us in the sensible, lets-do-what-we-have-to-do-for-the-good-of-the-country independent centre.
DiA: The primary fiscal challenge facing America is its spending on entitlements. Will it be possible for the parties to compromise on reform of programmes like Social Security, Medicare and Medicaid? If so, what do you think those compromises will look like?
Mr Bartlett: Cutting entitlements is hardly an exclusively American problem. Every advanced country has the same problem. What the European countries have, however, is a social contract and more of an egalitarian ethic. People there know that even if benefits are cut they won’t be thrown to the wolves. And businesses and rich people accept higher taxes as part of the social contract as long as their position in society is maintained and they will still be permitted to make a profit.
American conservatives—unlike those in Europe—still don’t accept the legitimacy of the welfare state or its fundamentally conservative underpinnings in a Bismarckian sense. (The welfare state provides stability, prevents revolution and accepts a certain diminution of freedom and rule by technocrats as a trade-off.) They still believe that America is the new world free of European rigidity, where survival of the fittest rules and that instability is okay as long as we get more growth in the process.
But what if we don’t get faster growth? Are Americans capable of dealing with a prolonged period of stagnation? Will they meekly accept their fate as the Japanese have done? I think not. It’s not in the American character, although I don’t know what form the alternative will take.
We may need to give conservatives one last shot at power to prove that their ideas won’t work—a conservative version of the Great Society, in which every pet liberal idea was given a chance to succeed before failing—before the American people will finally concede that tax cuts don’t pay for themselves or automatically shrink spending through some magical starve-the-beast mechanism, that getting spending under control will require more than cutting foreign aid and waste-fraud-and-abuse and that benefits for the elderly—a prime Republican constituency these days—will have to be meaningfully and painfully cut, and that taxes will have to be increased.
I think it may take another ten years before reality finally seeps into the electorate and a conservative can talk realistically about what has to be done without being run out of the Republican Party on a rail.
DiA: What would be the benefits of a value-added tax and why won’t Republicans or Democrats get behind the idea?
Mr Bartlett: The key area where Republicans and conservatives continue to live in a fantasy world relates to the inevitability of higher taxes to the long-run solution to our fiscal problem. At present, they all live in a dream world in which massive spending cuts that don’t hurt average Americans are the only solution to the deficit that they will entertain. But sooner or later, they will realise that this is simply not possible and that tax increases are not the worst thing in the world—Ronald Reagan raised taxes 11 times, including in 1982 when the economy was still in recession, and contrary to right-wing predictions Bill Clinton’s 1993 tax increase did not send the economy into a tailspin.
Once upon a time not too long ago there were serious people in the Republican Party willing to negotiate with Democrats in good faith on the issues of the day for the betterment of our country. Now they are all gone. Until they reappear our fiscal situation will get worse. Democrats can’t do it by themselves; they need someone on the Republican side with whom they can negotiate. I don’t see any such person anywhere in the country at the moment.
DiA: Do you think we’ll ever see a VAT in America?
Mr Bartlett: Eventually, we will have to enact measures to reduce the deficit. These measures will necessarily have to include higher revenues. Initially, they may be called user fees, offsetting receipts or other euphemisms, but they will raise revenues. Polls show that Americans are not averse to soaking the rich or taxing big businesses. Eventually, these will be enacted as well. After maybe ten years of doing this, Republicans will finally support a VAT as a tax reform, which will be used to undo many of the previously-enacted revenue increases. They will rationalise their support for a VAT on the grounds that they are not raising taxes, but only changing their composition. But in fact it will be a retroactive tax increase.
Personally, I think it would make more sense to avoid a decade of economic and financial pain and do what is necessary today. But there is no possible way of getting even a trivial tax increase through Congress today, let alone a VAT.
Eventually, American conservatives need to make the deal that European conservatives made after the war: liberals basically spend the money—subject, roughly, to a balanced-budget constraint—and conservatives raise the money in ways that don’t overly burden capital. This means that conservatives have to accept the welfare state and liberals have to give up redistribution on the tax side. But we are a long ways away from such a deal even being discussed.