A deficit hawk's guide to deficits in a recession
Stan Collender, a self-described deficit hawk, says that a terrible recession is a time to be a little less hawkish.
From my perspective, rather than just being against everything all the time that increases the deficit, deficit hawks will have a much bigger impact and be far more effective if they do the following:1. Advocate aggressively and forcefully for reducing the deficit. Pay-as-you-go rules for new proposals are important, but existing programs already in the baseline shouldn’t get a free pass.
2. But understand that there are times, like when the economy is in the tank, that reducing the deficit or running a surplus is the wrong fiscal policy.
3. Be the one that helps define when a deficit is appropriate. One of the most important contributions hawks can make will be to communicate this so that it becomes the common wisdom. Their credibility will be enhanced in the process.
4. Don’t allow the deficit to be a partisan issue. Both political parties frequently use the deficit as an excuse whenever they oppose something but don’t want to state the real reason for the opposition. That makes the deficit into more of a political football and less of a serious issue. Members of Congress, candidates, party officials, think tanks, etc. all need to know that they can’t claim to be a deficit reducer today when they advocated unwarranted deficit increases yesterday.
5. Advocate as forcefully for debt reduction as deficit reduction when it makes sense economically.
To which I would add:
6. Don't reflexively rule out some tax increases. We aren't going to do all we need to cut the federal budget deficit through growth and spending cuts alone. Carefully considered, moderate tax increases -- maybe some sort of national consumption tax -- are probably part of the solution if we want to do right by our descendents.
Comments
While I generally agree with the sentiment that increasing tax revenue can be justified... the absolutely last way I'd want to see that accomplished is by adding a tax on something we want to encourage like consumption but even worse is the prospect of an entirely new method and a new bureaucracy to achieve it.
How about increasing import duties on those same goods the consumption tax would hit? Or fix the AMT by raising the threshold and the rate?
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A bit more in support of Mr. Collender's arguments:
What do you do when we're plunged into the worst recession since 1929?
You can't cut taxes because they are already so low that half the people pay no tax and the wealthy pay only 15%.
Corporations use offshore tax havens and the 1st year additional depreciation and the many other tax breaks to avoid taxes. That is, those that actually have an income, most have losses.
You can't lower interest rates because they are already at zero.
You can't increase the money supply because the last Administration had already borrowed so much from China for non-budgeted wars that they are already complaining about the falling dollar.
You can't ask the Banks to lower loan requirements because they have given away so much money that they are rapidly failing.
You can't start a war because you are already in two Wars.
You can't reduce regulation on businesses because they were all taken off during the last 8 years.
You can't do anything other than increase spending to try and turn the spiral around and hope you can appease China.
So those of you complaining about tax rates, find me a corporation paying taxes right now. In fact, Obama has decreased corporate taxes by allowing companies to file for more years of loss carrybacks than the Bush Administration had available.
Cut taxes on those with no job, that will do a lot to help. Or just eliminate all taxes and shut down the government, we are getting close to that at the state levels and it seems to be working Really well. LOL.
So those of you complaining about businesses not hiring, they will not hire until they have customers buying their products and they will not have customers as long as people have no jobs to pay their bills and no longer have any credit.
Obama and Bernake have no options left but to try and Stimulate the economy by printing money and spending. George Bush had already depleted all the other methods economists use to turn a recession around.
Posted by: MrRational | December 18, 2009 7:32 PM
Some interesting suggestions and observations by Mr Rational but I disagree with a few of them, as do I with raising taxes in general. Carter's malaise speech http://www.youtube.com/watch?v=1IlRVy7oZ58 really comes to mind.
As for already deregulating business, it is true that has happened for big businesses, specifically monolith financial services with the repeal of Glass-Steagall 1999 that allowed banks to get into securities trading, and the CFMA 2000 that turned the stock market into a casino . But for small businesses there has been no regulatory relief. A 5-10 person company still must comply with the same employer contributed payroll tax rules as Walmart. Someone who wants to open a business is still presumed by the state to be unqualified to do so until he proves otherwise.
The fact is over the last year we have taken big steps toward a centrally planned economy: effectively nationalizing the auto, and financial services industries, and allowed an unprecedented level of money value manipulation by the central bank. We make policy based on false suppositions that are accepted as fundamental absolute truths:
Supposition: deflation is bad and should be fought at all costs
Truth: deflation is the natural result of improvements in technology
Supposition: unsustainable price levels created by unsustainable credit (housing) need to be propped up by more unsustainable credit
Truth: these prices need to be allowed to fall to sustainable levels
Supposition: your house is an investment
Truth: your house is a consumer good
Supposition: the government can create wealth from thin air
Truth: the government can only divert wealth that is already there
Supposition: GDP or output is the best indicator of prosperity
Truth: given that free time is what makes most people the happiest, forcing people to toil away making stuff they don't need and probably don't even really want is not the best indicator of prosperity or "utility"
Supposition: any proposed project can be justified by the fact that it creates jobs
Truth: digging a hole and filling it in again, while advocated by Keynes, makes nobody any better off
Think about these from a common sense perspective. You mean to tell me the stuff I buy getting cheaper is bad and needs to be prevented by central bank manipulation? You mean to tell me that the government can make wealth out of thin air? You mean to tell me that as long as someone is toiling away at something it is positive regardless of what is produced by it? You mean to tell me when it takes 2 workers to maintain the same household living standard it used to take 1 worker to maintain that is a good thing?
There is a "curious ignorance" when it comes to American's understanding of the central bank, monetary policy, and common sense economics. Until that is cured we are doomed to suffer the consequences and will be servants to our masters.
Posted by: Josh Dowlut | December 20, 2009 4:54 PM
Josh,
Some of your points have some merit but when stated without the hyperbole and/or invective you seem so fond of the escaping hot air tends to leave the points like shriveled balloons in the mud.
Your style remind me of Dick Morris who also gets ignored.
Posted by: MrRational | December 20, 2009 8:12 PM
Save the personal attacks for the rants and raves section of craigslist. The only hyperbole and invective was in the last paragraph.
One important point I forgot to include is the other side of the Keynesian equation which is most forgotten: running surpluses. Keynes never advocated deficits on top of deficits and a piling up debt financed by "quantitative easing" (newspeak for printing money). He advocated running surpluses during the good times and deficits in the bad balancing to no long run accumulated debt. His theories have been twisted solely to justify expanding the size of government. The famous something for nothing multiplier formula wasn't even developed by Keynes and wasn't even published until over a decade after "The General Theory" was published and is another example of "twisting" his theories to support a forgone conclusion of bigger government.
Posted by: Josh Dowlut | December 21, 2009 5:07 PM