We’ve been having two parallel debates in this country, one informed by rich people who want to steal American retirement security so they don’t have to pay taxes on it. That side of the debate is exemplified well by Bill Keller this morning – unfortunately this op-ed is not a joke. Keller’s is the thinking of the CEO class, turning to wish-list legislation like Bowles-Simpson to protect their assets and take away yours. From Michael Hiltzik in the LA Times:
In any environment of serious debate, Simpson-Bowles would be dismissed out of hand. Praised for its sober bipartisan spirit, it’s a compendium of flatulent platitudes (“We all have a patriotic duty to make America better off tomorrow than it is today”), vague prescriptions (“cut all excess spending” and “avoid excessive taxation” — as if reaching broad agreement on the meaning of “excessive” is a snap), and the occasional nostrum that earns a “not” on the gonna-happen scale (strip down the mortgage-interest deduction). According to some estimates by the nonpartisan Tax Policy Center, the plan’s sample cuts in the tax deductions wouldn’t replace the revenue lost to its proposed reductions in marginal tax rates.
“The Moment of Truth” bills itself as a roadmap to deficit reduction, but it’s really a guide to cutting services and benefits for the working and middle class while raising revenues only modestly, if that. (The authors claim to raise tax revenues across the board, but the only way to do that while cutting marginal tax rates, as they propose, is to eliminate virtually all tax deductions, which manifestly is far more difficult than cutting rates.)
On a completely parallel side, economists have begun to take a look at the effect of austerity on the US economy. And yes, we’ve had it; cutbacks in stimulus combined with forced trims in state and local budgets have put the US on an austerity course since mid-2010. That’s the point at which government spending dragged on GDP growth, and it continues, particularly at the federal level. Just as state and local budgets have begun to come back, federal spending has turned sharply negative for the economy, with cuts everywhere. Today, the Wall Street Journal, of all places, recognizes this reality:
Recent economic data show that long before the fiscal cliff hits, federal spending already is falling—and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.
Such figures understate the full effect of the cuts, as lower federal spending hits military and civilian contractors and cuts into federally backed infrastructure spending at the state and local level. Taken together, the cuts are partially offsetting private-sector growth that, while slow, has been consistent.
“It’s unbelievable how much the economy is getting hurt already by the sharp drop in federal spending,” said Joe LaVorgna, chief U.S. economist for Deutsche Bank.
And the remedy for that is additional fiscal support. The economy has not reached escape velocity, where it can sustain itself on its own. And we have a massive demand gap, which private business investment or trade is not currently filling. Only government, as the spender of last resort, can provide the solution. That’s the implication of the WSJ piece.
In theory, these two imperatives don’t have to come into conflict. Many have suggested a program of spending more now, and saving later. But the points of emphasis are completely at odds. The fiscal scolds focus on the deficit, while others focus on the fact that we have millions of Americans out of work and a weak economy that needs stimulus. The scolds put the cart well before the horse. The economy is a sick patient and we should not look to determine her blood pressure 20 years from now until we get her well.