The DC Village has been infected by a mass case of stupid, making dunderheaded and dangerous arguments about the deficit in the same way that they made dunderheaded and dangerous arguments about Iraq in 2002-3. Just as the elites made up a threat under false pretenses back then, so too today. And in this case, the deficit hawks don’t care about the deficit, armed with an ulterior motive to make the middle class and the elderly suffer at the expense of the rich and connected.
It’s a sad commentary on American politics that the only honest man left on the playing field, when it comes to the deficit, is Alan Greenspan.
Former Federal Reserve Chairman Alan Greenspan, whose endorsement of George W. Bush’s 2001 tax cuts helped persuade Congress to pass them, said lawmakers should allow the cuts to expire at the end of the year.
“They should follow the law and let them lapse,” Greenspan said in an interview on Bloomberg Television’s “Conversations with Judy Woodruff,” citing a need for the tax revenue to reduce the federal budget deficit.
This puts Greenspan out of step with national Democrats, which is not unusual, but in this case it’s interesting. The President campaigned on not raising taxes for anyone making under $250,000 a year. In the insane vernacular of Washington, letting a tax cut expire equals a tax increase, and so Obama has called for extended the section of tax cuts for that income class. Max Baucus’ Finance Committee has a bill to that effect.
Now, the reason why Greenspan wants those tax cuts to expire shows how much of a fool he is and why he really shouldn’t be cited by any serious person (I’m only mentioning him in this case because of his stature in Washington, which I’ll cover in a moment):
Ending the cuts “probably will” slow growth, Greenspan, 84, said in the TV interview. The risk posed by inaction on the deficit is greater, he said.
“Unless we start to come to grips with this long-term outlook, we are going to have major problems,” said Greenspan, who led the U.S. central bank from 1987 to 2006. “I think we misunderstand the momentum of this deficit going forward.” [...]
Greenspan has warned for months that the rising federal debt and deficits projected in future years together risk driving up long-term interest rates and choking off capital investment. In a March 26 Bloomberg TV interview, he said an increase in long-term interest rates was a “canary in the mine.”
Yields on 10-year Treasury notes have since fallen from 3.85 percent to 2.98 percent at 2:31 p.m. in New York.
Nice understated humor from Bloomberg there.
But where Greenspan becomes useful is on allowing the tax cuts on the wealthy to expire. The rich thrived under Clinton, when the tax rates were marginally higher. Heck, they thrived under Eisenhower, when the top rate was 91%. They always thrive. That’s why they’re called “rich.” They can pay their share for their outsized use of the commons. Now, Alan Greenspan, supporter of the tax cuts originally, agrees.
Why you would allow the tax cuts on the rich to expire and not on those with lower incomes (though it’s unclear where to draw the line) is that the excess money gained by the rich goes into financial transactions or just sits in a bank, walled off from the economy. Tax cuts to the poor end up being spent, and have a higher multiplier. In this case, we would be lowering demand by letting those cuts expire. And that’s the wrong place to be at this time.
Funny to see Alan Greenspan as the only honest person about the deficit in DC.
UPDATE: Peter Davis thinks the Obama plan will go through:
My conversations with top Hill staff of both parties convince me that Congress is very likely to wait until a lame duck session in December to pass a one-year extension of the Bush tax cuts for those under $250,000 ($200,000 for singles). This will maximize tax rate uncertainty for small businesses and will hit the equity markets with a 39.6% dividends top tax rate, up from the current 15%. Both President Obama and Senate Finance Chair Max Baucus (D-MT) want a 20% top rate on dividends, but I don’t see Congress reaching an overall compromise on the Bush tax cuts that would pay for the 20% rate. Then, if the Republicans take the House on November 2, we’ll experience budget gridlock as the public debt rises toward 87% by 2020.