In some ways, this year is the culmination of a long, failed experiment based on the notion that cutting taxes increases growth and makes up for the lost revenue. Didn’t happen; was never going to happen, even though lower tax rates are obviously better than higher ones for growth, if you can afford them. I favor the lowest and simplest tax rates compatible with a balanced budget. That’s called conservatism. I do not favor the lowest and most complex tax system regardless of its budgetary impact. That’s Republicanism.
The long-term consequence of this unconservative Republicanism is we have no lee-way and no margin of error in stimulating the economy after a financial crash. The Bush-Cheney GOP spent all the money and left us with the worst recession since the 1930s. The only way the Bush tax cuts were passed at all was on condition of their expiration if they did not work as promised. They didn’t. The only issue at hand right now therefore is how to fix the long-term imbalances the Reagan era created, the Clinton era began to fix, and the Bush-Cheney era turned into farce. Doing that in a global slowdown is all the trickier. But there seems little doubt to me that the months after this election may be the most significant fiscally since the 1980s. If our election debate were about that, it would concentrate minds wonderfully.
To that effect, Jonathan Masters provides a primer on the fiscal cliff, which Congress just kicked down the road. Jared Bernstein urges us to focus on the payroll tax, as a way to soften the blow:
The tax increases to the middle class can and should be offset by temporary measures like a payroll cut which fade once the economy is back on track. In fact, since middle class families pay much more in payroll than in income taxes, this is actually a better economic deal for them. Recent CBO data reveal that in 2009: a) among households that pay both income and payroll taxes, you have to get to the 90th percentile until they pay more income tax than payroll tax, and b) middle income families spent 1% of their income on federal income taxes and 8% on payroll taxes….
William Gale wants to play chicken with those tax cuts:
“Going over the cliff would give lawmakers both the opportunity to enact a budget deal because they would have more revenues and less spending already in the baseline…,” says Gale…. “What I would like to see us do is combine a temporary fiscal stimulus with the idea that we go over the fiscal cliff and let the Bush tax cuts expire.”
It’s too risky an option in these times, I’d say. But cautiously. A lot depends on the balance of political forces after November. Mark Thoma worries about the eventual showdown:
The Republican Party will not tolerate any action that puts its long-run goal of lower taxes and a smaller government at risk, and this makes it impossible to form a coalition with Democrats to oppose harmful austerity and instead put temporary fiscal policies in place that could promote a faster recovery.
Unless a big loss this fall “breaks the fever” – which is why I’m hoping for (if not expecting) a bigger night for Obama and the Dems than the polls indicate. The fundamental problem right now is that one party is unhinged. The more we can do to keep them in the margins the likelier we are to come to some sane compromise. Speaking of which, Michael Hiltzik beats up on Simpson-Bowles:
According to some estimates by the nonpartisan Tax Policy Center, the plan’s sample cuts in the tax deductions wouldn’t replace the revenue lost to its proposed reductions in marginal tax rates.
But that can easily be fixed in the negotiation. The broad contours of Bowles-Simpson are what matters – especially its Pentagon-cutting. Joe Weisenthal notes that the current drop-off in federal spending is already doing damage:
Government spending isn’t growing like crazy. It’s shrinking. And it’s hurting the economy. Ben Casselman and Conor Dougherty at the WSJ (via Ben White) have a great look at how cuts in federal spending are hampering the recovery…. [And] Deutsche Bank’s usually bullish economist Joe LaVorgna is quoted as saying: “It’s unbelievable how much the economy is getting hurt already by the sharp drop in federal spending.”
Brad DeLong is gloomy about long-term unemployment:
The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment. Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.
No sign of help from the Fed, which released its latest policy statement yesterday.
(Photo by Zach Klein)
The Dish 