Monday, December 3, 2012

To Prevent the Country From Committing Fiscal Suicide, Congress Must Commit Political Suicide

Several of my bosses, past and present, have recently channeled Warren Buffett and told me they want the government to raise taxes on them.  This stunned me a bit.  Like many business owners they are all conservative.  Or at least conservative-ish.  Meaning they all fall somewhere between Dick Cheney and Ron Paul on the political spectrum.  These are generally anti-tax people.  They believe taxes should be kept as low as possible for the simple reason that they believe people should keep as much of their own property and income as possible.

So how do these guys finally arrive at a tax raise?  As conservative-ish people, they also believe in personal responsibility.  Therefore, these are not the type of people who are inclined to leave a mess behind.  Failure to handle the budget now just means they're dumping it on their kids, and their kids will have it even worse.  We've arrived at a point where it may actually make sense under the rules of conservatism (or at least conservative-ish-ness) to increase taxes.  Because somebody has to pay the debt, and true conservatives are not the type of people who pass on their problems to someone else.

The counterargument to raising taxes is that it removes cash from businesses that they could use to invest or hire more people.  This is not false, but not necessarily true either.  Most of the bosses and ex-bosses I talked to could hire more people, but they don't have enough work to give to new people.  Nobody hires people to do nothing.  Unless there's some wacky union contract involved.  They could invest in new business, but the market is uncertain.  They, like many people, are being cautious.  New investments are always risky, and when there are plenty of analysts foretelling of a double-dip recession, new investments are very risky.

Getting the debt under control would eliminate some of this uncertainty.  America's credit rating (recently downgraded) is one of the foundations of the global economy.  Until recently, treasury securities were considered the closest thing there is to a risk-free investment, and investors and analysts used it as a benchmark by which the attractiveness of other investments could be measured.  The downgrading of our credit increased the uncertainty, which is why investors are cautious.  That's partly responsible for the slow recovery.

Of course, Republicans always bring up cutting spending and possibly closing loopholes rather than raising rates.  And they're right.  But in order to cut spending in a way that actually brings the debt under control, significant cuts must be made in defense, Medicare, and Social Security.  In order to significantly raise revenue by closing loopholes, some of the more popular loopholes, like mortgage interest deductions, would have to go.

This is the problem.  Nobody wants to lose the things that they like.  Raising rates is more popular than removing the mortgage interest deduction, because raising the rates in the top tax bracket would only affect a few people and removing the mortgage interest deduction would affect many more people.  Cutting defense is more popular than cutting Medicare and Social Security, because most people currently or eventually will benefit from Medicare and Social Security.  Strictly speaking, everyone benefits from defense, but it's impact on our lives is not as tangible as entitlement programs are.  Because of this, defense cuts are more popular than entitlement cuts.

The problem with cutting popular programs is that politicians see value (Read: re-election) in defending them.  Anytime someone talks about Medicare or Social Security reform, politicians with no interest in reform and a great deal of interest in re-election dust off the same old tired talking points.  Gems like "Medicare is the most popular government program" or "Social Security is the most successful social program in the history of the world," are bandied about in order to prevent government from taking real action.  I think these statements are generally true (although talking points, by their nature, are always at least one part falsehood), but they are only true for the time being.  Once Medicare and Social Security become fiscal train wrecks (an eventuality we've seen coming for decades), they won't be considered popular or successful anymore.  We have to fix them now.

The solution is that everyone needs to give up something.  Something we like.  We can't expect someone else to take care of this for us.  We all have to be willing to give something.  If this means the rich pay more taxes, let's consider that.  If this means the payroll tax ceiling is raised or removed, let's consider that.  If this means benefits are reduced or retirement ages are increased (the latter is likely necessary, since we all live longer these days), let's consider that.  If this means cutting defense or removing mortgage interest deductions, let's consider that.  I know some rich guys who are willing to put up some money, the rest of us should think about ponying something up as well.

We should pass a bill that increases taxes and/or removes loopholes.  And the new revenue must be committed primarily to controlling debt. No earmarks or pet projects. These revenue increases must be married to spending cuts, including defense, Medicare, and Social Security cuts.  And there must be triggers in this bill that require that all of these things be done within one year of passing the bill, or else everything in the bill goes back to the way it was prior to the bill's passage.  This last part is critical.  Reagan raised some taxes in return for a promise to cut spending in the eighties.  The Democrats reneged.  This time, it can't be a bait-and-switch.

In order to accomplish this, everyone in congress will have to sign off on a bill that includes at least one thing that upsets their supporters.  This is the type of compromise we need.  Traditionally, politicians are only interested supporting bills that have negative effects on someone else's constituents.  This can't continue.  The members of congress may have to commit political suicide to pass a bill like this.  But it's better than the entire country committing fiscal suicide.

No comments:

Post a Comment