Deficits, Taxes & Shared Pain

I'm not an economist, but I played one in college--well enough to know that if you put 100 economists in a room, you'll get at least a dozen inconsistent theories (and the makings for a really exciting cocktail party!). I believe there is no economic basis for choosing between spending cuts and tax increases. As Matt Dowd pointed out on This Week today, there is no empirical evidence for favoring either. Any hit to economic growth will occur as a result of eliminating debt financing itself, regardless of the source of deficit reduction. The real issue is purely political: who will bear the inevitable pain and when? If we don't deal with the deficit now, the pain will be deeper and more widespread when America's financiers ratchet up rates and the federal low-interest debt bubble bursts.

I could rail forever about these issues, but I will keep my main points brief:

1. Tying deficit reduction to the debt ceiling is stupid. I don't even know why the debt ceiling exists. The need to borrow inevitably flows from a failure to collect enough revenue to pay approved expenses. There should not be a second vote required to pay the bills after the government has already approved the expense in the annual budget. The Republicans' use of the solvency of the United States of America to extort fiscal policy initiatives they could not pass during budget negotiations should be a criminal offense.

2. The federal government must find a more mature way to compromise now to achieve the deficit reduction everybody agrees must occur. We are borrowing money at zero interest to finance current expenses, but unless we magically return to a budget surplus, that debt will have to be refinanced in the future, inevitably at higher interest rates. We are building a federal debt bubble that is exactly like the home mortgage bubble. The Fed is creating a gigantic adjustable-rate mortgage on America's future, and when China and Japan insist on higher rates, the bubble will explode. The United States will not default; it will use powers no homeowner has in his arsenal: the government will either raise taxes dramatically or print money, triggering massive inflation. Inflation is the equivalent of a tax on wealth, and Americans' real net worth will plummet. So take the pain now and cut the deficit, or take the pain later through massive inflation. There will be pain.

3. The only real deficit reduction question is who will bear the pain, and the obvious answer is everybody. Whether senior citizens have to pay more out of pocket to cover their medical care or basic needs or higher income Americans pay more taxes, that money will be removed from the economy and is likely to have similar impact on economic growth. Intuitively, it seems to me that there would be a greater impact from taking money away from poor and middle class people because they would surely have spent the money, whereas the wealthy are more likely to stash it in a savings account where it won't stimulate any growth (especially when banks are afraid to lend). (I never understood the argument that taxing a doctor, lawyer, major league athlete or pop star at 39% instead of 35% would somehow impair job creation.)

But even if we assume every dollar has the same impact on economic growth, there is no difference between a domestic spending cut and a tax increase. The decision is pure political jockeying among representatives of different interest groups, the rich, the middle class, the poor, and the elderly. My thoughts on wealth distribution have been documented in a prior post: Wealth Distribution, The Law of the Jungle, & Seeds of Revolution. But in the spirit of compromise, surely any reasonable solution will include some combination of spending cuts and tax increases.

4. Republicans are saying President Obama has not presented a specific plan. Well, presenting the specifics would be kind of pointless when the Republican position has been that they will not compromise no matter what details are presented. That said, the President supports the report of the bipartisan deficit reduction panel (Erskine-Bowles) which presents numerous options to choose from to reach different levels of deficit reduction. When the Republicans show up ready to compromise on taxes, both sides can pick their pain right off the Erskine-Bowles menu. If they don't compromise, the massive inflation triggered by the bursting of the debt bubble in a few years will destroy all that wealth they're protecting so vehemently, anyway.

What's your opinion?

Wealth Redistribution, The Law of the Jungle & Seeds of Revolution

We look on with hope and concern as revolution breaks out across the Middle East, but as the world's great bastion of democracy we seem to consider ourselves immune from civil unrest. I think that's a mistake. The conservative agenda is planting the seeds of revolution in America, and in a democracy revolution does not require violent rebellion. It simply requires the votes of an oppressed and organized majority.

Unbelievably, conservatives' solution to the looming deficit crisis continues to focus on cutting back social programs for the poor and middle class and leaving marginal tax rates in the highest brackets at historically low levels. Progressive taxation and wealth redistribution have become hot buttons conservatives press to denounce the liberal agenda, equating any interference with free market forces with socialism, an evil so obvious it requires no further argument. But attacks on wealth "redistribution" imply that the starting point is a "correct" distribution brought about by free markets, and my question for laissez faire capitalists is this: "Why do you only object to restraints on liberty that diminish your wealth?"

We are a society of laws that create the environment for wealth creation. Property rights do not exist in nature--there are no laws in the jungle, and without laws there are no property rights, and without property there can be no wealth. The right to own property to the exclusion of others is bestowed by governments--the people, in a democracy--as a way to maintain order and encourage productivity. It is the most fundamental right in a capitalist society.

Yet this fundamental right is itself an enormous restraint on liberty. In the jungle, "ownership" of property exists only for so long as it can be defended against others. The grant of property rights by law is thus the greatest redistribution of wealth in the history of mankind, shifting the natural right to possess land or things from the most powerful (whether by physical strength, weaponry or the ability to amass forces) to those who stake valid legal claims (the intelligent and crafty?). While this is a sound way to organize a productive society, let's not pretend there are not winners and losers; let's not pretend the baseline chosen by conservatives as the "correct" distribution is one produced by natural forces.

Laws are contracts among men, and no man would willingly enter a contract against self interest. In fact, even the law generally renders contracts entered into under duress unenforceable. It follows, then, that when men subject themselves to laws created at the societal level, there must be something of value exchanged in return. In the social contract that forms the basis of any government, I'd argue that the value received by the masses is equal opportunity and a safety net (defined by the relative wealth of the society) for those whose abilities do not permit them to compete effectively for a fair share of resources. Is a minimum quality of life for the masses--who have given up their freedom to take whatever nature offers--too great a price for the wealthy to pay for (relatively) free markets, which do not exist in nature?

The American conservative movement is trying to renegotiate this social contract at a time when resources have become increasingly concentrated in the hands of the few. The top 1% of households own about 35% of the national wealth; the top 20% control about 85% of wealth. (If you have net worth above $500,000, you're in the 20%.) This is the backdrop against which conservatives claim that our tax system is too progressive, that the wealthy bear too great a burden and the social safety net must be cut back to reduce the national debt. All these damn laws that effectively redistribute weath (hah!) are a restraint on free markets and the rights of the most productive members of society.

Apparently, there is little objection to the laws that allowed for this concentration of wealth, whether or not they interfere with free markets. Corporations, which provide the mechanism for amassing capital, exist only as legal fictions. Patents and copyrights place restraints on free market forces in favor of the creators of intellectual property. Expensive regulations maintain the fair and proper functioning of markets. Police forces and armed forces protect valuable property rights from criminals and foreign powers. Many men have died to protect our system of economic freedom, few who've had country club memberships. The wealthy benefit from these expenditures (in human life and national treasure) disproportionately, yet somehow this argument never comes up when conservatives urge a flat tax in lieu of progressive income taxation. (The flat tax is a particular peeve of mine, more on that in a later post, I'm sure.)

Don't get me wrong, I believe people should generally be allowed to operate under the belief that they will keep what they earn, but free markets are not gods to be blindly worshipped. They are a means of achieving the goals of society--maximization of total wealth (productivity) and fair distribution. When free markets fail to achieve the goals of society, interference is warranted. The principle that the great capitalists will raise the standard of living of the working class simply by pursuing their self interest is proving a flawed assumption. Besides just getting too greedy (grossly disproportionate exec pay, criminally reckless tax cuts for the wealthy), capitalists are not appropriately taking into account societal risks in calculating self-interest (climate change, systemic financial system risk), warranting government regulation.

But the one societal risk to which conservatives seem most blind is violent or nonviolent rebellion by a disenchanted working class. In a law-based society, when the rules start to favor an increasingly small minority, the majority will eventually abandon the rules. Ask George III or Louis XVI. Or if you prefer to speak with the living, ask Hosni Mubarak or Moammar Gadhafi. Even if conservatives don't buy into the moral imperative for a wealthy society to maintain a decent standard of living for its working class, it's in their economic self- interest to maintain that minimum standard. If the 20% doesn't start taking better care of the 80%, eventually the 80% will get organized enough to vote in politicians who recognize that the Constitution makes no promises about free markets or a "correct" distribution of wealth. Conservatives' greed will lead to the destruction of the economic system that allows them to create and maintain a very unnatural distribution of society's wealth.

My third novel, tentatively entitled HOSTILE TAKEOVER, will take a deeper look at how foreign powers might sew these seeds of revolution to their advantage. Could Asian forces use their rapidly accumulating wealth to influence U.S. elections and/or lay claims to America's resources? Stay tuned.