Streetwise Professor

February 22, 2009

What the Left Hand Giveth, the Left Hand Taketh Away

Filed under: Economics,Politics — The Professor @ 3:36 pm

Obama’s “fiscal responsibility” summit will preview his soon-to-be-released budget.   After leading a spending stampede on the stimulus, and starting another on the mortgage bailout, Obama now proposes to undo the fiscal consequences of this Bacchanal by–wait for it–raising taxes on businesses and the wealthy.

The phased, sequential nature of these steps suggests to the cynic in me that this was the plan: use panic and fear (rather than hope and change) to rationalize a massive spending increase; then use the resulting panic and fear over the resulting deficit to rationalize a major tax increase.   Funny how this works to implement the traditional left-Democrat tax-and-spend agenda.   Got to give the guy credit, in a way.   Like Rahm Emmanuel says, a crisis is a terrible thing to waste.   Obama has opportunistically exploited the current economic situation to implement what would likely have been a non-starter otherwise.   (Why couldn’t the stimulus package be incorporated into the normal budgeting process?)

Is it churlish of me to suggest that these two pieces of the agenda are logically inconsistent?   One the one hand, the Keynesian rationale of the stimulus bill means that deficit spending IS the stimulus.   By this logic, reducing the deficit through large tax increases undoes the effects of the stimulus.   Can’t have it both ways.   (Now, I disagree with the assumption that the deficit was all that stimulative for the very reason that people would expect that it had to be paid for through higher taxes sooner or later.   But that wasn’t the argument that Obama and the stimulators advanced.)

In other words, justifying the stimulus on Keynesian grounds completely undercuts the justification for reducing the budget deficit through tax increases.

And this fundamental inconsistency is what convinces me that the true motivation for Obama’s moves is not based on a logically coherent view of economics, but that they are instead motivated by a logically consistent political view.   That is, this inconsistency, and the vertigo inducing speed with which these fundamentally contradictory policies followed one after the other, are what convince me that Obama is engaged in a cynical, opportunistic exploitation of economic distress to implement a long denied leftist agenda.

Think of it.   Together the “stimulus bill” and the budget proposals: (a) profoundly shift the nature of the tax system, by dramatically increasing marginal tax rates and business taxes that are likely to have extremely perverse incentive effects, while at the same time implementing tax credits that are purely redistributive in their effects, and which have no salutary incentive consequences (quite the opposite, because they effectively raise marginal tax rates); (b) smuggle in an undoing of the welfare reform of the 90s; and (c) dramatically increase Federal spending as a fraction of GDP.

This is all playing out quite along the lines of what I had foreseen in my “the worse, the better” post-election post.   (Which John Fund of the WSJ Political Journal characterized as a “rant.”   Rant?   Moi?   I was the voice of sweet reason!   And, perhaps, prophesy.)   The main difference is that it has been executed more cynically, and cagily, than I had anticipated.

The main question is whether this audacious agenda will engender significant popular opposition.   Too early to tell whether the tax/budget policies will do so, but it is interesting to see the nerve that the mortgage proposals struck.   Whereas the tax proposals are difficult to grasp in their complexity, pretty much everybody can understand, intellectually and viscerally, the fundamental unfairness of the mortgage bailout.

I think that a focus on the complete intellectual inconsistency of the step-on-the-gas-slam-the-brakes nature of the stimulus and tax/budget efforts would also generate considerable opposition, though probably not of the same, personal intensity.   The disconnect between the we-need-deficit-spending-to-fight-depression-but-we-need-vastly-higher-taxes-to-close-the-deficit is so stark that it will inevitably raise questions about the sincerity, and hence the true motivation, of these policies–and of the politician who is championing them.

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  1. I believe middle class America knows the only way to pay back the stimulus package is through higher taxes along the line somewhere. What middle class America does NOT like is the situation the banking community is in and the deregulation that contributed to this mess.

    It is clear you are not an Obama fan, though you might secretly admire him, however, he was elected and is stuck with whatever Bush left him with. If to some, this seems like a cagey way of implementing a recovery system, so be it, because the people at least see something being done, even if they do not entirely understand it.

    And as John Rund said, “you are on a rant”, yes you are but that is what blogs are for.

    Comment by springer girl — February 22, 2009 @ 6:15 pm

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  3. I am curious, what would you see as the ideal for the long term? Clearly taxes will have to go up, but would some form of sales tax (comparable to the goods and services tax in Canada) be better in the long run than payroll or corporate taxes? I you exempt food (the kind bought in supermarkets and not restaurants), you would encourage saving and investment as opposed to consumption, while still raising a large amount of money that could help pay down the deficit. What do you think? True, people would not like it, but will they have any other choice in the long run.

    Comment by Michel — February 22, 2009 @ 9:27 pm

  4. Hmm, the ideal. Well, first, I am a realist, and I recognize that what I (a Hayekian/classical liberal) would consider ideal will not be realized. I would prefer that the government get much smaller. Not going to happen.

    Given that we are cursed to live under Leviathan, how best to pay for it? Definitely not using the current US tax code. Definitely definitely not using Obama’s proposed alternative. Both are biased against saving and investment. Both distort the flow of capital by favoring investment in housing and real estate.

    I prefer consumption-based taxes. Low to no taxes on capital. (Capital taxes are very detrimental to growth.) Wide tax base.

    Like Friedman, though, I have issues with a value added tax because it is stealthy, and people don’t recognize fully the full tax burden.

    So. . . relatively low tax rate on very broad tax base, with few deductions except a relatively generous personal deduction, and for savings/investment. This would be a consumption tax, but it would be collected in a way that people recognize the full tax burden.

    The ProfessorComment by The Professor — February 22, 2009 @ 11:41 pm

  5. SWP, the Dems are indeed cynically implementing a political agenda, not an economic one.

    What’s worse it that they are bribing the Republican – and Dem – governors in the states.

    What’s even worse is that the Repub governors are abdicating their responsibilities – “it’s not for me to judge the wisdom of this federal money coming to my state – my job is to take the money.”

    For what? Well, so far, the script is exactly the same – “roads, bridges, ‘infrastructure,’ education and the kids, including their health care.” It’s as if they have all been hypnotized.

    How on earth is that any sort of stimulus?

    To paraphrase Everett Dirksen – “let’s know tax you, let’s not tax me, let’s tax that wealthy fellow behind the tree.”

    Comment by elmer — February 23, 2009 @ 8:16 am

  6. Craig, what would a consumption tax look like if it is not a VAT? Just curious as to whether you have some examples of such taxes that are already in existence. Sadly, the United States may opt for an easier solution: “printing” more dollars, driving up inflation, and thus devaluing what is owed this way. I am hoping that saner heads will prevail.

    Comment by Michel — February 23, 2009 @ 11:39 am

  7. 1. Yes, I am very sad too. Inflation is on the way. I am investing heavily in TIPS. We are supposed to be comforted by the notion that the Fed has the tools to sop up all the excess liquidity it has injected into the system when money demand turns around. Unfortunately, those tools–namely raising interest rates dramatically–would likely stall any nascent recovery, and perhaps trigger a new recession. As a result, I don’t think that they are credible “time consistent” policies. That is, they are promises that are easy to make today but politically impossible to keep in the future.
    2. An “income tax” with (a) very few deductions for things like interest on mortgages, and (b) a deduction for bona fide investment/savings would be effectively a consumption tax. The deduction for investments is what turns this “income tax” into a “consumption tax.” It has the virtue of a not requiring a complete remake of the tax collection system. And it has all the chances of a snowball in hell of getting implemented in the current political environment
    3. This idea has been proposed from time to time as a way of migrating the US income tax system to a consumption-type tax. However, its elimination of virtually all deductions has made it politically unpopular. Those deductions are there for a reason. Not economically good reasons, but political ones.

    The ProfessorComment by The Professor — February 23, 2009 @ 11:52 am

  8. Raising interest rates presumably would only push those people under who are likely just barely making their mortgage payments. This will be a difficult year. I will have to ask my mother to borrow an acre to plant some potatoes just in case ;)

    Comment by Michel — February 23, 2009 @ 12:24 pm

  9. Well, was it not dear leader Bush and republicans who cynically exploited 9/11 to advance their agenda? The current situation is quite symmetric, if you ask me. Democrats would be idiots not to use the current crisis to their advantage, this is just the way the system works, “he who has the gold makes the rules”, or something like that. Too late to cry wolf after the past 8 years and the endless exploitation of 9/11. I despised Bush’s follow up on the 9/11, and some of the current economic changes might carry negatives too.

    On the other hand, the out of hand pay of many senior managers and the relative poverty of a big chunk of the population does call for some effort to consider and implement some elements of redistribution of wealth.

    Myself, I am on the liberal-libertarian part of the spectrum. Still, I am very much in favor of things like the universal health care, since this would increase the overall liberty in the system by reducing some of people’s worries about medical assistance. The same reasoning applies to social security, it did make the system more civilized, making people more free overall.

    Now, such changes could lead to the slippery slope of the less effective Swedish socialism, but having loads of population in relative poverty also destabilizes society quite a bit.

    Comment by ukrainian — February 24, 2009 @ 12:46 am

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