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A Change That Is Difficult To Reconcile With Fiscal Prudence

The recent tax cut controversy is the result of a quirk of the rules that the Republicans used to pass the original Bush tax cuts. If the tax cuts, which added literally trillions to the deficit had been passed as normal, they would have likely been written as permanent. Republicans, though, used Budget Reconciliation rules to avoid filibusters, which is ironic, because their tax cut policy went against the actual purpose of those reconcilation rules: to make the unpopular work of reducing deficits easier. Republicans have just demonstrated their willingness to repeat their mistake.

Let's be blunt here: the deficit has gone down under Democrats. The Healthcare bill, by comparison with both the alternative policy of doing nothing, and the Bush policies it modifies in part, actually saves the taxpayers on deficit spending. Democrats recognize that when you enact new spending, it's got to come from somewhere, and it's not always practical to cut some other program to get the money.

The Republicans want to pretend like tax cuts don't increase the deficits. They've thought themselves into a corner, where they've actually forbidden the idea of using a tax increase to close up the deficit as part of the special deficit reducing package of rules we call reconciliation. They've also exempted tax cuts, and the deficit reducing effects of the Healthcare reform law from that consideration.

That means the Republicans are now rewriting the rules in a way that will allow them to pass reconciliation instructions on the budget without chance of filibuster that contrary to the original purpose of reconciliation instructions will increase the deficit.

Republicans and conservatives can't have it both ways, but it doesn't prevent them from trying. Let's call this what it is: hypocrisy. Let's call this what it is: a one-sided approach to resolving our current dilemmas.

When the time comes that austerity is appropriate, when we have prosperity again to reduce deficits and deficit spending, as in the Nineties, the likelihood that we will actually match revenues to spending by spending cuts alone is unlikely. It's even more unlikely now, given our economic situation. But that's the foolish consistency the right has gotten addicted to. Having roped themselves to a policy of perpetual revenue reduction, the Republicans have given themselves the worst practical performance on fiscal matter of the two parties. Yes, they attack Obama over the deficit, one created by a war they support, tax cuts they voted for, new entitlement spending they voted for, but then the leaders of the GOP and the conservative political movement are not counting on people to use reason when analyzing their policy.

That's the dirty little truth about the whole thing. It's not a secret, it's bloody obvious. They talk about people's pocketbooks. They're appealing to people's greed. Well, you can't go wrong appealing to people's base desires, campaign wise, but let's face the ugly truth here: it's not done our national debt much good.

Irresponsible levels of taxation create irresponsible spending. When long-term revenue reductions make it impossible to balance the budget without spending reductions that a party would pay a political price for implementing, the deficit spending remains. When you pay for the government you get, you mind what's going on when increased spending results in increased taxes.

We can't get back to the responsible level of revenue we once had until we've reconciled what America can do as a country economically with what it is doing. There's no point in squeezing the American people through austerity if it only increases the poverty that has America's businesses sidelined in their growth, and America sidelined in its own prosperity. That is why I, unlike many who claim rhetorical consistency on the subject, advocate putting off budget tightening measures until later. The truth is, we won't get far in dealing with the deficit until we deal with the structural problem in our economy. Only in the political imagination, only in the politically correct terms of the campaign trail is revenue from taxation not a consequence of what people and businesses are making.

Few people are real fans of being taxed, and that's a fact that's often used to push the notion that lowering taxes is always a good thing. We're told we get to keep our money, that government's not reaching into our wallet, so on and so forth. But rhetoric and politics is one thing, and reality another.

The reality is, we like many things that government does for us, and we'd miss them. That even goes for Republicans, who right now are unlikely to approve any great reduction in our very expensive defense establishment, or the Tea Partisans who speak up in ironic defense of Medicare against the government.

The reality is, these things cost money. If we're not getting rid of them, we must pay for them, and we will pay for them, one way or another.

The reality is, attempts at stimulating the economy through tax cuts have had mixed results at best. The same could not be said, economically, for the deficits they create.

The reality is, tax cuts have been one of the major drivers of fiscal imbalance, contributing to literal trillions of dollars of deficits.

The reality is, continued economic deprivation in this country both reduces the effectiveness of what taxes are left in creating revenue, and of any deficit reduction method, since those methods would drain money from an already cash-strained economy.

Rather than simply continue to apply oversimplified rhetoric, and appeal to people's baser instincts about paying taxes, the Republicans should encourage a more responsible attitude towards budgeting, one that acknowledges, rather than fights these economic realities. I know the political purists will object, but what good will come of listening to their complaints? The problems that draw heat to Washington will remain. The deficits, despite the good intentions of the conservatives, will not go away, not if the Reagan or Bush years are any guide.

In the near term, we need to fix the economy. It's like the reservoir that powers a hydroelectric generator. Without the water to spin the turbine, any plans to increase or decrease the power levels derived from the power source are vain talk.

In the long term, we need to acknowledge that the equation has both sides, and that we are invested not merely in the money we keep, but in the money we spend to fund the things we want Government to do for us. We have interests both in what the government takes, and what the government gives back, and we ought to balance those interests where we think is appropriate (but nonetheless balance), rather than pursue either interest blindly.

Posted by Stephen Daugherty at December 28, 2010 12:06 PM
Comments
Comment #315948

Mr. Daugherty writes; “Let’s be blunt (dishonest) here: the deficit has gone down under Democrats. The Healthcare bill…actually saves the taxpayers on deficit spending when you enact new spending.

HUH? Can’t wait to read about the next Magic Act performed by dems.

Posted by: Royal Flush at December 28, 2010 4:38 PM
Comment #315958

The budget deficit will be less this year than last year. In 2009 the budget deficit was $1785.6 billion, and in 2010 it will clock in at about $1471.0 billion. Please note the budget deficit is not the same as the national debt.

Posted by: phx8 at December 28, 2010 5:33 PM
Comment #315963

Royal Flush-
It’s not magic. It’s called offsets. You balance the beginning of new spending with either the end of old spending or old tax breaks, or with new taxes.

When asked about offsets recently, your future Speaker of the House said that they weren’t necessary for the tax cuts he wanted continued, that they would in fact defeat the purpose.

Republicans didn’t offset Medicare Drug Benefit or the new part C Benefits. They didn’t do much of anything to make sure the taxpayers could bargain or see costs controlled. They didn’t offset the wars or the tax cuts. They ran deficits.

Because new taxes or the end of old tax breaks is politically incorrect in the old maoist sense under the GOP, the budget austerity under the Republicans is inevitably one-sided, and inevitably ineffective.

The Democratic Party rules of Pay-Go, which began in 1990 under the Democrats, along with the Clinton Tax rates, helped balance the budget.

The Republicans, who did not renew Paygo helped unbalance it, and now use the product of their irresponsibility against the Democrats.

Now they issue a pale imitation of the original PayGo, which treats deficit spending forced by tax cuts as permissable. Now they rig the reconciliation rules so they can pass those tax cuts past filibusters under rules meant to reduce the deficit.

Your brand of fiscal prudence has no meaning because it ignores parts of the equation that nonetheless apply.

A bad economy never supports a good fiscal situation well. It’s pointless to enact austerity to stem economic problems when the economic problem itself is austerity, the inability or fearful unwillingness to spend that deprives businesses of customers, people of employment, and drives revenues down.

And really, your tax cuts do matter. Every time your people have implemented record cuts, the consequences have been higher deficits. The national debt has exploded under the most recent Republicans Presidents employed massive tax cuts to try to stimulate the economy. In neither case did employment recover as intended in the wake of the tax cuts. There’s very little correlation between the tax cuts and the eventual recovery of the economy.

The only reason I didn’t support the entire lapsing of those cuts is the simple fact that the economy- more particularly, the poor and Middle Class, did not need to be deprived of even more money, and the economy doesn’t need to suffer for the lack of their ready spending.

The magic act achieved by the Republicans is to project an image of fiscal responsibility despite the fact that deficits and debts rise in the wake of their policies.

Posted by: Stephen Daugherty at December 28, 2010 5:59 PM
Comment #315970

SD said In the near term, we need to fix the economy. It’s like the reservoir that powers a hydroelectric generator. Without the water to spin the turbine, any plans to increase or decrease the power levels derived from the power source are vain talk.

Your example sounds plausible, but isn’t accurate. In reality, when a reservoir is either overfull or underfull, it negatively affects the ability of a dam in creating hydro-electric power.

In other words, a ‘happy medium’ is best. Like the “Laffer Curve,” there’s a balance between taxation at 100 percent and at zero percent. One-hundred percent taxation basically equates to zero revenue because people will not have an incentive to work and produce; they will use the barter system and/or find tax havens and loopholes to avoid taxation.

Taxation at the zero percentage rate obviously creates zero revenue. However, there’s a point in between, depending on the dynamism of a particular economy, where revenue is maximized, yet creates positive economic growth and job creation.

Deficits in the short-term aren’t necessarily a bad thing. However, the long-term debt can be catastrophic if it reaches too high as a percentage of our GDP. That’s where we are headed now. It weakens our nation; it creates uncertainty for global trade and the bond market; it stiffles innovation and infrastructure spending; and it causes enormous political battles where fear and paranoia follow.

The most important part of lowering taxes (capital gains, income and other taxes) to stimulate economic growth is to couple them with less spending. Twenty of the world’s top economies followed Reagan’s supply-side economic model after 1982. Why did they copy us? Because it worked.

Of course over time, the majority of those countries abandoned this model and changed to the Western European style of Socialism. They now regret this and are implementing austerity programs across Europe.

The US must be careful not to be too austere in its approach during a weak recovery. However, we must cut entitlements, military and non-discretionary spending. There cannot be any ‘sacred cows.’ It’s amazing how when one lives within one’s means, he or she gets used to it and prospers and saves even more. No one ever said it would be easy, however.

Posted by: Kevin L. Lagola at December 28, 2010 7:56 PM
Comment #315972

Kevin,
I would agree that there is a theoretical ‘sweet spot’ for taxation. Based upon experience, it would seem that we neared that spot during the Clinton years. The Omnibus Bill of 93-94 increased taxes, yet we saw tremendous growth in the ensuing years.

Percentage of GDP is not a particularly useful number. Percentage of budget might be more important to consider. Because of low interest rates, the huge debt represents an unusually low percentage of the federal budget. Given the low rate, borrowing and running up the debt and deficit actually makes sense. As the economy picks up, rates will increase, and servicing the debt will cost a larger percentage as the interest rates creep back up again.

There will be one crucial consideration as the economy grows: how to create jobs. That will determine whether the expansion will be sustainable, or simply result in another Bush era style of recovery.

By the way, the Western European style of socialism has succeeded quite well, certainly much better than the Reaganesque model. The EU difficulties are chiefly the result of the failures of the American financial sector and its bogus securities. The EU (and others) bailed out the US at great cost to themselves. Now the rest of the world is powering ahead without the US, driving up demand for commodities in the process. Every major industrial country in the world has universal health care through its government. Many fund education.

Despite phenomenal increases in productivity, American workers are no longer competitive. Sadly, the conservative answer is to re-distribute money upwards, trash the middle class, and reduce workers to a wage of $3 or $4 dollars per hour. It’s sad to see our country decline so far, so fast.

Posted by: phx8 at December 28, 2010 8:23 PM
Comment #315983

Kevin L. Lagola-
First, if we want to talk about the success of austerity programs, we have to look at whether anybody’s really coming out of them better off. Otherwise, what’s the point? If you kill your economy or leave yourself unable to get out of debt, then it really didn’t help things, did it? Neither Greece nor Ireland are coming out of their austerity programs much better off.

But some of the wheelers and dealers are.

Results matter. If Record tax cuts don’t lift you out of the economic doldrums, which it did for none of the big cuts, then it’s not reasonable to tout them as the answer to that particular problem.

I look at the unemployment results for Reagan’s tax cuts, and I have to conclude that there is some other reason than “it works” for the policy. When your great idea of cutting taxes to improve the economy fails to push back against a massive recession, fails to prevent eleven months worth of unemployment over ten percent, thirty two months of higher unemployment than when you started, I don’t know why I should consider it a success.

The example of Bush’s cuts don’t impress much, either. He even beat Carter and Bush 41’s lows in job creation. He wasn’t even keeping up with population growth. The rich saved, did not spend the money, which defeats the purpose of a stimulus which is meant to goose the economy, not leave it lying their like a lump while cash accumulates at the top.

The assumption is, the nicer we treat those on top, the nicer they treat us. Well, we’ve seen to their interests quite a bit over the last couple decades, given them a lot of space to use their best judgment.

I have lived through thirty years worth of experiences that tell me that there are certain mistakes people don’t learn from because they are so profitable and easy to keep secret in the near term, if things are not. Things are just too competitive and people’s morals just too flexible, the ethics too situational. It’s not that people can’t make the right decision, it’s that they won’t, and that is the basis for my philosophy of where we must apply law and regulation to constrain the behavior of business. If people can reliably see to their own interests through the market, I have no interest in applying the law. If they cannot, if the market repeatedly fails to incentivize the right behavior, keeps reinforcing the bad kind, if people will not stop behavior that is self-destructive to the market, I think it only wise to bring the government into the matter.

This is one of those times. Our situation isn’t self-correcting, and it isn’t healthy. I think it’s time we do what we must to recover, and I think a lot of people, given the choice, would make that choice. Unfortunately, some people would much rather our nation suffer in consistence with their principle, than prosper running contrary to them. If we Democrats are in error that is fine, but how are Republicans so wise to determine what error is, to be given the benefit of the doubt on economic matters, given how badly everything has turned out.

Posted by: Stephen Daugherty at December 29, 2010 12:00 AM
Comment #315994

While the $1471 billion budget deficit could easily be fixed by the American Consumer and Small Business Owner purchasing U.S. Tresury Notes. What effects would it have on Private Corporation who is only motived by Greed?

No, both the short and long term solution are not going to be fixed using 20th Century Thinking. And why conservatives will fight tooth and nail from admiting President Obama is Politically Correct to say America can win the Race to the Top in building a Green Sustainable Society. I do believe in their ignorance of wanting to prove OBL wrong they have lost sight of what Americas’ Private Citizens can do just given their Guaranteed Civil and Constitutional Rights.

For example; Ford and GM could offer the Local, State, and Federal government a deal on electric cars and trucks. For why profits are needed, they could offer the vehicles at 5% above manufacturing costs and the rest in Tax Credits paid out after 5 years. Thus, the Corporation still makes a profit, increases production which will lead to better cars and trucks, and provide jobs for the thousands of Auto Workers layed off.

Another good example would be solar and wind manufactures providing our governments with the products which will take the local, state, and federal buildings off line and may give the electric corporations the opportunity to purchase any excess energy in order to help rebuild their Treasuries.

Yes, the Dems and Repubs can sat around complaining that they have no ideas on how to jump start the economy and wait until the 2012 Election where I am sure an Independent Presidential Candidate can debate President Obama on how we make America energy independent, rebuild our infrastructure, and put our citizens back to work making a better life for themselves and their children.

However, unless the Republicans want to try tough love on the Private Business Sector IMHO there can be reconciling fiscal prudence. For why the conservatives and tea party wants to cut entitlements on Medicare and SS in order to balance the budget, by not compromising with President Obama and the Democrats in Congress in allowing the top 1% of the Bush Tax Cuts expire the Republicans have already shown they have no idea on how Trickledown Economics works even after 30 years.

And why a Trickle Up Economy has some serious kinks which needs to be worked out, how else does Labor and Management figure to increase the income of the American Consumer, Small Business Owner, and Tax Payer by 400% and still remain competitive in the global economy?

Posted by: Henry Schlatman at December 29, 2010 6:29 AM
Comment #316018

SD said, “Democrats recognize that when you enact new spending, it’s got to come from somewhere, and it’s not always practical to cut some other program to get the money.”

Stephen actually said a true statement. What he forgot to say, when they need more money, they just print it. Tell me SD, when did the democrats EVER cut a program?

Posted by: TomT at December 29, 2010 4:56 PM
Comment #316047

TomT-
I really caution people against rhetorical excess like yours. It kind of makes it easy to defeat your arguments.

I guess your next complaint will be that it’s not enough.

As for just printing money? It is a risky proposition, but I doubt it would be done if there was some other way to keep money flowing in this economy. I wonder, would you be calling for a raising of interest rates or anything like that? If you really understood inflation, you’d be calling for that, to reduce the money supply. That would reflect your actual belief better.

However, your actual beliefs, then, would be more problematic, because they don’t line up with the reality. Tell me, why, with all the QE1’s and QE2’s, and the huge budget deficits, is inflation not going through the roof? If all other things were equal, the effect of that would be rather strong inflation. In fact, Bush’s actions were about to send us into that territory, before the housing bubble collapsed and gutted a huge portion of our balance sheet wealth.

Why do your people persist in treating this economy as if its in an inflationary spiral it’s not? Why does the average conservative out there think that the best way to respond to an economy that’s already become austere in its finances, where people already have too little to spend, and aren’t spending enough of it, is to add even greater austerity on top of that?

The general macroeconomic point of austerity is to get people to stop spending and start saving, to encourage less investment and a lower return on investment, to reduce the money supply. The truth here is that circumstances have already reduced the amount of money available for consumption, so inflation is not a problem anytime soon.

Deflation is. Some say it’s a good thing because it forces things to become cheaper, but it does that by undermine everybody’s financial fortunes to the point that they can no longer afford to buy anything, or pay back debts. It’s essentially those market forces that are supposed to correct things coming back with such a vengeance that they overcorrect and send us into a spiral of greater and greater economic dysfunction.

American needs mild inflation to grow, to keep itself prosperous. America doesn’t have that now, but the Republicans are intent on solving the inflation problem even though we don’t have that problem now.

Posted by: Stephen Daugherty at December 30, 2010 7:55 AM
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