In an op-ed by my boss, Bob Bixby, which ran in yesterday’s Boston Globe, Bob mentions how “ideological straitjackets” have been preventing us from effectively treating either of our two largest economic ailments:
We have two distinct problems. The economy remains shaky in the near-term, and fiscal policy remains unsustainable in the long-term. These problems can, and should, be treated with different remedies.
The good news is that we can treat both problems at once if we set aside rigid ideological straitjackets. Fiscal stimulus need not have an adverse impact on economic growth over the long term, and long-term discipline need not have an adverse impact on economic activity in the short term. We don’t need to sacrifice one to achieve the other, but we need to be clear about the trade-offs.
This suggests that deficit-financed initiatives may still be appropriate for policies with the highest propensity to support the near-term recovery. Items that fit into this category include extended unemployment benefits and further, but temporary, aid to state and local governments. These policies would directly address serious needs created by the severe recession without adding to the long-term structural deficit.
At the federal level, we can hold down the size of near-term deficits and help engender public trust that tax dollars are not being wasted, by making every effort to identify savings from unnecessary programs.
That includes cutting narrowly targeted tax breaks that add to the complexity of the tax code without producing meaningful economic benefits. Such provisions divert resources from more pressing national needs and increase public cynicism about the fairness of the federal budget.
Again, there is no inconsistency in cutting some under-performing programs while boosting spending (or cutting taxes) in areas where it will do more good.
Even with a robust recovery in the next few years, the pre-existing mismatch between future benefit promises and current levels of taxation would leave us on an unsustainable path. No amount of fiscal stimulus will solve that problem. This makes it all the more important to combine near-term deficit spending with a credible plan to bring our long-term structural deficit under control.
Balancing the risks, we should keep assistance flowing in those areas where it is most needed and can take effect most swiftly, and, as soon as possible, begin a planned phase-in of spending cuts and tax increases that will bring the structural deficit under control.
Of course, this will require some compromise.
Can we handle that?
Kevin Williamson of the National Review seems to be screaming over his frustration with the conservative straitjacketed position that deficit-financed tax cuts are somehow fiscally responsible:
You know what? Kyl is right: The money does belong to the taxpayer. You know what else? The money Jon Kyl and his colleagues are spending belongs to the taxpayer, too. Jon Kyl’s been known to pork up a highway bill in 2008 — even as he voted against one of the worst of them in 2005. (And Kyl’s one of the good ones.) If you spend the taxpayer’s money, you have to tax the taxpayer, at some point. You cannot magic that money into existence. As I’ve been arguing — ad nauseam, forgive me — taxes are a secondary issue. The primary issue is spending. As ye spend, so shall ye tax. The rate of spending is the rate of taxation; debt and deficits only push the date of tax collection into the future. You can collect the taxes today or you can collect the taxes tomorrow — but what you spend, you will have to collect.
Tax cuts without spending cuts, spending increases without tax increases: These are not merely irresponsible, they are impossible — unless you think that nobody is going to pay the debt. You might make a reasonable case that tax cuts without spending cuts are, in some cases, preferable to deficit stimulus spending, especially since the stimulus spending has been channeled to a lot of dumb and wasteful projects. But, broadly speaking, the two things are equivalent. The Democrats prefer unfunded spending, the Republicans unfunded tax cuts. And almost nobody is serious about reducing spending, because spending is where power dwells in Washington.
But on a very positive note, this weekend former Fed chairman Alan Greenspan seemed to be busting loose from his long-worn, but perhaps often misunderstood, ideological straitjacket of the Bush tax cuts, when, in an interview with Judy Woodruff (see a clip here), he said the best thing we could do with the expiring Bush tax cuts is to simply let them go (emphasis added):
WOODRUFF: You embraced the tax cuts of former President Bush, George W. Bush, in 2001, with the caveat that this hinged on keeping the deficit under control. In retrospect, do you wish that you would have spoken out any louder as it became clear that that deficit was growing?
GREENSPAN: Well, I thought I did. In fact, there are all sorts of hearings. I remember conversations between Barney Frank and myself, where he was saying, in a sense that, do I understand you essentially saying that effectively unless the second tranche of the tax cut — which was then occurring in the context of deficits — was adjusted by pay-go — meaning financed — that you would not support it. And the answer was I would not support it. And I did not support it.
The trouble is, there is a very selective reading of history out there. I mean, I find it unfortunate, but there are a lot of things that happened which I discussed in great detail and it sort of is — my main concern myself is the fact that we ought to go back and look at the records.
WOODRUFF: On those tax cuts, they are due to expire at the end of this year. Should they be extended? What should Congress do?
GREENSPAN: I should say they should follow the law and let them lapse.
WOODRUFF: Meaning what happens?
GREENSPAN: Taxes go up. The problem is, unless we start to come to grips with this long-term outlook, we are going to have major problems. I think we misunderstand the momentum of this deficit going forward.
This argument of stimulus versus non-stimulus, in my judgment, is not a critical issue, in one sense. We are going to be doing very well if we can keep the deficit to where we are now projecting it. The notion that we are somehow going to bring it in far more sharply is just utterly, politically unrealistic.
So it is not a question, do you have more stimulus now or do you have basically a significant contraction in the deficit? We are going to have continued expansion in government spending and increasing debt, because there is no evidence that we are closing the debt — the gap between receipts and expenditures yet. And it is going to be very tough to go up against the momentum that is currently going on.
WOODRUFF: So to those interests who say but wait a minute, if you let these taxes go my taxes go up, it is going to depress growth?
GREENSPAN: Yes, it probably will, but I think we have no choice in doing that, because we have to recognize there are no solutions which are optimum. These are choices between bad and worse.
Greenspan suggests at the end that raising taxes will (unfortunately) mean economic growth will be harmed–just by not as much as if we let the deficit swell by the cost of extending the Bush tax cuts. But I’d remind readers that raising revenue to keep taxes at current-law levels does not necessarily mean sticking to current tax law and allowing marginal tax rates to come back up. What Greenspan is saying is that we need more revenue (and in particular, the level dictated by the current-law baseline looks pretty appropriate), and that however we come up with it looks good relative to not coming up with it. But some ways of coming up with the extra revenue are still going to be better than others. That’s why tax reform has to be part of our overall strategy to get back to fiscal sustainability, along with reform of the entitlement programs and greater discipline in our discretionary spending.