Fiscal Policy and American Governance
As I have said often, one of Barack Obama's first moves as president should have been to announce that he would veto any bill that did not reduce the projected national debt in 2020--that that was the best way to set up the pool table to get us to policies that provide for short-term stimulative deficit spending to promote recovery and long-term budget balance to promote fiscal sanity. Obama, instead, prefers to talk about how the government must tighten its belt via discretionary spending caps and federal salary freezes in the short term while permanently extending tax reductions without regard to PAYGO for the long term.
The only saving grace is that he is not nearly as bad as his Republican counterparts.
Simon Johnson on the lack of grownups in American government:
Voodoo Economics Revisited: Democratic and Republican leaders in Washington are suddenly falling over themselves to agree on the need for major tax cuts – affecting not just middle-class Americans, but also very rich people (both living and when they die). Does this sudden outbreak of the long-desired bipartisan consensus indicate that a new, stronger America is just around the corner? Unfortunately, the opposite is true. What we are seeing is agreement across the aisle on a very dangerous approach to public finance: a continuation and extension of what President George H.W. Bush memorably called “voodoo economics.” Its consequences are about to catch up with America, and the world.
Bush was competing with Ronald Reagan for the Republican nomination in 1980. Reagan suggested that tax cuts would pay for themselves, i.e., actually raise revenue – a notion that became known as “supply side” economics. There’s nothing wrong with worrying about the disincentive effect of higher taxes, but the extreme version put forward by Reagan did not really apply to the United States. When you cut taxes, you get lower revenue, which means a bigger budget deficit. To be sure, no serious people are claiming the full Reagan effect today.... But there is a broader Reagan-type reasoning at work here....
Experience with fiscal policy over the past few decades is clear. It is worth stimulating the economy with discretionary fiscal policy only occasionally – specifically, when not doing so would be calamitous. Thus, it made sense to pursue a fiscal stimulus of some kind in early 2009.... [But today] a further fiscal stimulus may prove counterproductive, with the extra spending counterbalanced by the negative effect on the housing market of higher interest rates....
A year from now, what kind of economy will the US have? Any short-term “fiscal stimulus” effect will have worn off, unemployment will still be high, and there will no doubt be politicians clamoring for more tax cuts. The budget deficit will likely be in the range of 8-10% of GDP, even if growth comes back to some extent. And the bond markets will be much more nervous....
Some people expected Paul Ryan, a rising star within the Republican Party who will become Chairman of the House budget committee in the next Congress, to provide a fiscally responsible anchor to the next round of the deficit debate in the US. Writing in The Financial Times in early November, Ryan suggested, “America is eager for an adult conversation on the threat of debt.” But all indications are that he is just as childishly reckless on fiscal policy as most of his Republican colleagues since Ronald Reagan.
Unfortunately, there is no sign yet that the Democratic leadership is ready for a mature conversation about fiscal consolidation, either. Both parties’ leaders will get there – but only when dragged, kicking and screaming, by the financial markets.
