Rediscovering the Joys of Deficit Spending
Envisioning a Democratic Future
By blackhedd Posted in AMT | Deficits Growing | Economy | Fiscal Deficits | Fiscal Policy — Comments (24) / Email this page » / Leave a comment »
In case you hadn’t heard, there’s an election this year, and it’s going to be an important one. Inasmuch as the Democrats are doing their level best to sabotage their chances to win the White House, it’s not a forgone conclusion that Senator McCain will not become President.
But the view from here continues to be that Democrats will either hold steady or gain on Capitol Hill. So while I think the mood of the country still strongly favors conservative policies on a range of issues, including the economy, let’s for a few moments try to discount what a Democratic-controlled future will look like.
It doesn’t take more than a touch of native intelligence to understand that if the Democratic Presidential contenders get their way, we’ll face an enormous amount of new government spending. But they’re also talking about major tax relief for lower and middle income people.
How are they going to square the circle?
Read on…
I find it highly credible that either a President Obama or Clinton, with continued Democratic majorities in Congress, will seek to make the Federal income tax sharply more progressive.
It stands to reason that you can lock down the electoral loyalty of a great many non-rich people by cutting their taxes. In a climate of recession, reduced home values, and high consumer-price inflation, the political moment will be right for a rewrite of the income tax. The logical place to go would be to fully eliminate income taxes (except FICA/FUTA) on all household incomes below $150,000 or even $200,000. Income above that level would be taxed at a high, flat rate (essentially the current AMT), perhaps increased to the Clinton-era 39% or more.
Apart from its political benefits for the Democrats, this strategy would make permanent the current trend toward low growth in the US economy.
At the same time, the Democrats will want to enact major new spending programs, including increased Federal support for state and local governments. (This is a sleeper issue we never discuss much, but you’ll find it in every single Democratic stump speech and policy initiative, including the mortgage relief now working its way through the House. The national Democrats are very well aware of the important work that their farm teams at lower levels of government do for them.)
And of course, there will be a national healthcare initiative, stronger environmental and labor regulations, a commitment not to reform entitlements, and a continuation of the War on Terror at nearly current levels (the Democrats will find it impossible to bring the troops home).
All of this costs money, but it won’t come from higher taxation, which has deflationary effects on the money supply.
Rather, the Democrats will discover to their delight that there are emerging countries all over the globe with central banks that have more money than things to do with it. They will continue to lend it to us at relatively low rates of interest.
After several elections of fiscal-discipline rhetoric, the Democrats will rediscover the joy of mainlining on borrowed money.
Now let’s be quite clear about something. Deficit spending is fundamentally a form of credit creation. It results in the creation of new money almost as effectively as if the Fed printed it. And of course, as a device for expanding the money supply, it competes with the Fed, which is why Fed chairmen tend not to be in favor of it.
But in a world where money has no intrinsic value, it ultimately doesn’t matter how much of it there is. What really matters, in terms of the material well-being that people actually experience, is the amount of goods and services that they can consume.
And unless we enact policies that increase the risk-adjusted rates of return on capital in the US, our aggregate ability to produce goods and services will not increase. We face many years of low growth with moderate-to-high inflation.
So what will be the effect of a large amount of new deficit spending, in an economy that can’t grow to accommodate the new money creation?
The effect will be to increase the relative proportion of our aggregate productive capacity that is disposed by the government.
And as a practical matter, that means that an ever-increasing share of our total production of goods and services will be consumed by older people. Our production mix will shift toward healthcare and low-value-added services like retail, hospitality, legal services, and government.
I’m never entirely convinced by arguments against deficit spending that take the form: ”It’s unjust and immoral to mortgage our children’s future by spending their money now." Saving is deferred consumption by individuals, but the government doesn’t save, because that’s a meaningless concept for an entity that creates its own money.
By the same token, there’s no real meaning to the idea that our children and grandchildren will pay for our current consumption. Someone always has to produce the goods and services you consume, when you consume them.
Saving and investment do increase the amount of production available for future consumption if done intelligently. But in an inflationary, low-growth environment with low returns to capital, it’s not rational to save and invest. The American people, who have uncanny horse-sense when it comes to personal finance, recognize this reality subliminally, which is precisely the reason that saving rates are now at or below zero.
The real effect of shifting so much economic activity to relatively unproductive uses will be to curtail overall economic growth. Our children will pay for this as they fall behind the rest of the world in relative terms. And they will be less and less able to compete for limited resources with people in countries that are growing at faster rates.
In sum, a Democratic ascendancy this fall will result in the enactment of policies that are precisely the opposite of what America’s economy needs to start growing again. But there will always be people at the high end of the economic scale who will have the flexibility to participate fully in the global economy, supplying goods and services for consumption in other countries.
Thus, the Democrats will also enact policies that will achieve precisely the opposite of one of their most cherished goals, which is to reduce income inequality.
John Edwards may yet see his dystopic “Two Americas” vision actually become real, thanks to Democratic policies.
-Francis Cianfrocca (“blackhedd”)
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I keep asking myself, "now how do I position myself to make a buck out of that scenario". I am actively looking for biz ideas.
Ask not what I can do for my country, ask what my country can do for me. Washington Elected Elite
imagine the folks who invested in Haliburton and the oil companies when President Bush came to office.
offered them all of those highly lucrative, single-source, no-bid contracts. His pardon of Mark Rich was less disingenuous than how he directed the Federal Government to let out contracts.
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
Tax Havens
Offshore corporations
Tax Shelters
You get the idea
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
How will we "rediscover" deficit spending? The last time I checked George W. Bush and the republicans in congress never lost it.
This seems a bit silly to me. Deficit spending isn't exactly a novel idea at this point. The Democrats might well be worse in this respect, but I find it hilarious to imply that we haven't been spending more than we've been making of late. Cutting taxes during a war, for example, is an interesting idea. I can't recall it ever happening before.
Fair enough. Care to comment on the whole "spending more than you take in" bit? It is a bit hard to blame the Democrats for it when the Republicans controlled the Executive and most of the Legislative branch for six years.
I hate that the Rs in Congress and our President got wrapped up in the political favor factory of spending $$$ irresponsibly.
You get no apologies for the Rs from me on this one.
Fighting for conservatism one day at a time.
Well, I appreciate your consistency. For what its worth, I'm not the only deficit-hawk Democrat. I'm for all the good government we can afford. While there are times to do into a deficit (great national need of some kind), it's ludicrous to run a government in that fashion as policy. We can argue over exactly what's worth the taxpayer's dollar, but we can agree that it's been a rough ride of late on this issue.
...but if you were to run the Federal government with a balanced budget, you're going to make the economy smaller and create a lot of pain. Why? Because deficit spending is a form of money creation. (Just like any extension of credit.)
If you go even farther and run the government in surplus, you'll tip over into serious deflation.
That was starting to happen back in 2000, which is why Alan Greenspan was initially in favor of President Bush's tax cuts. Then as soon as tax season came around in 2001, and the Treasury's receipts showed that the budget had swung from surplus to a large deficit, he immediately changed his mind and told the President that tax cuts at that moment would be a bad idea.
The right answer is to curtail government spending aggressively, which would include entitlement reform. The Democrats are promising to do precisely the opposite.
I assume that entitlement reform would be coupled with reductions in farm subsidies and so forth? Sharing the pain is the best way to move forward on that sort of thing. Perhaps a rollback of the prescription drug addition that was recently enacted?
If you want to shrink government, I can agree with that general proposition. The political problem is getting people to agree on what to cut. You know this. While I haven't much enjoyed paying for my parents' and grandparents' retirements through my current payments into Social Security, I do not wish to see those benefits denied them. I also hope to see some kind of benefits for myself when I get to whatever retirement age is at that point. I expect we'll have to raise the retirement age and means test the benefits, but the program does not have to be killed off. It can be more narrowly tailored than it is.
Or is the point just to kill the programs you disagree with on ideological terms? I'm not saying definitively that it is (I cannot read your mind), but I often get the impression from my Republican friends that this sort of talk is the thin end of the wedge.
I say this as someone who (a) has a natural, visceral aversion to deficit spending, (b) is a big believer in the practical benefits of divided control of government and (c) is as firmly in the McCain camp as it's possible to be, but going back 30 years, GOP administrations have been *much* *much* worse offenders on the deficit spending front. Obviously, there are always extenuating circumstances. Clinton, for example, was a great beneficiary of the Gingrich congresses (in a way that a republican president wouldn't have been), but at some point you've got to stand back and look at the big picture. Republicans, unfortunately, hold the lion's share of the blame on the national debt front.
Maybe you're right and the democrats will embrace deficit spending, but nothing about recent history suggests that this will be the case. I think that it's more likely that they will reduce deficits or maintain them where they are by offsetting their expenditures with large tax hikes.
-luvthelp
There's a very big difference between now and the last time a Democrat was in the White House: today, there are central banks all around the world that are bursting at the seams with excess cash, and a strong desire to lend it to the US Treasury at very low interest rates.
And borrowing their money will be a lot easier than raising taxes enough to cover all the spending the Dems will want to do.
Yes, they will certainly raise taxes, as a matter of politics. They want to produce what they've sold as fairness.
But as a matter of economics, you can't balance a budget only on the backs of rich people, and you certainly can't do it while raising spending. Therefore, deficit spending under Democrats will make the last several years look like fiscal discipline by comparison.
I take your points, but I still don't see that we can trust the Republicans to show any sense on this issue. They've had every opportunity to do so, yet they've failed. Is there something to be said for punishing them with a loss, forcing them to come back to those principles? Or is it better to continue voting for Congresscritters who fail abjectly to do what they should? This isn't a troll. I am quite curious to understand why anyone who opposes this kind of spending and continues to vote for the same guys who've been doing it.
Yes, I understand that Senator McCain is not President Bush. However, the Republican party (at least in Congress) is rife with appropriators who love to spend, spend, spend! If you keep voting for Republicans who do that, that's what you're going to wind up with.
I don't suggest that's what RedStaters want, of course. I've also seen you folks support candidates in primaries who better represent your views. That's entirely laudable. I just don't get the logic behind actually VOTING for candidates who totally fail to deliver, if only because the other guy will probably fail worse.
There is no better message you could deliver than a failure to re-elect such people. The longer we keep borrowing to pay for that which we want but are unwilling to pay for, the worse the bill becomes for our kids and their kids. Surely no sane American actually WANTS this.
To clarify, I do not suggest you vote for someone with whom you agree LESS (a hypothetical Democrat). I just don't see the sense in re-electing people like Ted Stevens on the basis that a Democratic challenger could, somehow, hog the trough even more.
Worked like a charm. Hillary is good at this, and Obama is getting REALLY good!
Remember the middle class tax cut of 1992? Which never happened.
Shamelessness is the hallmark of the Democratic pol!
for every single prospective voter.
Good work.
I meant what I said and I said what I meant. An elephant's faithful 100 percent.
Well, we could easily move all our business interests to Estonia - and they'd be happy to have us.
That's the really annoying part of much of this - the sheer yokelishness of so many in the face of real global competition at all levels of the game.
This is probably worth a separate diary, but this is as good a place as any for a short rant on how badly uncompetitive our tax and regulatory regimes have become - with so much blinkered blather about making that situation even worse rather than better.
I'm actually involved in international site-selection for a variety of activities - and if you think that none of what follows matters, think again.
Our present personal income tax system is a disaster. At one point c. 1986 we actually had reformed things down to only two brackets - but since then the reactionaries have been ratcheting it the other way. Meanwhile, the places that really want to get their economies growing have adopted a simple flat-rate income tax. I'm not here to argue philosophy or "fairness" - it just works. Why an entire political party is mindlessly wedded to becoming more like the sinking ships of western Europe escapes me.
The present corporate tax system is similarly disastrous. The rate is bad enough - it's now about the worst in the world. Even France has a lower rate now. But what's worse is that it's extremely easy to run afoul of some lovely rules (unique to the US) on overseas income - which is thusly taxed in the country of origin AND back in the US. This is insane - and that's not a philosophical comment. What's the point of putting up with this kind of nonsense when you can figure out ways to not do so?
If you want an example of what the competition is up to, consider this:
Estonia does not tax corporate income. Instead distributions of corporate income, such as dividends, are taxed.
(Actually, blackie, if you're reading this, check out the whole site and then ping me so we can figure out how to take better advantage of this.)
This kind of stuff usually touches off a nerdy-wonk style argument about philosophy and macro-level-thought and "fairness" - but the whole problem isn't philosophical but practical - it just works. Arguing about its philosophy and "fairness" is like arguing about the fairness of "F = ma"....
Another thing that has to go is the dreadful Sarbanes-Oxley (SOX) millstone. The direct effects - much higher costs of complying with the laws - have been much discussed, but we need to worry more about how this blob is messing up the whole system of creating and launching new companies - which is where a disproportionate share of both growth and innovation come from. To put it simply, SOX greatly raises the cost and aggravation associated with taking a company public. Risk capital investments are predicated on the implied return of getting to an "exit" - either an IPO or a sale of the company. If the IPO window is gummed up, that changes the calculations drastically - the focus has to be put more strongly on "sale of the company" exits (and, believe me, you get a different animal via that route - they tend to be much less innovative and ultimately of much lower potential) or the whole thing never happens in the first place. This is a business form of abortion - all kinds of "children" are eliminated but you never know what you missed (at least specifically - the general crater is discernible some 20 years later).
A side-consequence of all this is that more and more of the IPOs and listings are migrating away to London, where the reporting requirements are much more sane.
The last thing I'll mention is the need for either repeal or drastic reform of the Williams Act - since it's being (mis-)used in counterproductive ways that were unforeseen at its time of origin. But that's pretty wonky and we'll see if anyone (blackie? :-) ) has tangled with it.
from 41 cents to 42. IIRC, they did this last year right after tax time, too!
Re Sox, it's quarter end, and I flushed a fair number of hours down the time toilet as required by our enlightened legislators.
___________________________________
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Life in office.
Endlessly growing personal power.
Reducing the ability of the opposition.
Creating an aristocratic class in America that no amount of merit will gain entry to ?
Seems right in line to me.
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777