Wednesday, September 21, 2011

Walking and Chewing Gum at the Same Time

The more I think about the economy, and the mess it’s in, the more convinced I become that neither side of the political spectrum has a clue about how to fix it.  Both seem hopelessly locked into a narrative that, on its own, will not solve the country’s systemic problems.

Conservatives hold firm to the belief that if the federal budget were just slashed and entitlements were either privatized or given to the states to run then the “confidence fairy,” as Paul Krugman calls it, would instantly appear, cure what ails the nation, and all would be well with the world.  The reason we got into this mess in the first place, after all, had nothing to do with a lack of government oversight, but rather with the government and poor people living beyond their means.  Washington couldn’t control its spending and poor people bought homes they knew they couldn’t afford.

Liberals and progressives blame the mess on Republicans, who either ignored the warning signs of an economic collapse, or, worse, steered the ship right towards it.  They believe that the answer lies in massive government spending to prop up the economy; spending that will lead to more deficits and possible future consequences.  They steadfastly refuse to acknowledge that entitlements need to be reformed at some point and resist any attempt to make them part of a national debate, even if it means strengthening them.

Conservatives want tax reform, but only insofar as it means lowering and flattening the overall rate, and flat out reject the idea of increased revenues as a part of deficit reduction.  They want to drastically lower the corporate tax rate – some have proposed as low as 9% - to levels not seen in over a century.  For them, the debt is about spending, not revenues.

Liberals and progressives are adamant that revenues must be a part of any discussion on deficit reduction and maintain that Washington cannot just cut its way to a balanced budget.  While they have publicly lauded the idea of tax reform they have balked at the idea of lowering the corporate tax rate, instead choosing to focus on closing loopholes, ending subsidies and, as the President has called for, implementing the “Buffett Rule,” which would require millionaires to pay the same tax rate as middle class tax payers.

I know I’m going to get in troubling for saying this, but, while both sides have some valid points to make, neither seems capable of putting two and two together.  Here’s why:

It’s ridiculous for conservatives to blame the economic collapse of 2008 on deficit spending and poor people.  That simply flies in the face of every bit of data available.  But it is equally irresponsible for liberals and progressives to blame Republicans solely for it.  The repeal of Glass-Steagall in 1999 occurred under a Democratic president, who ignored the warnings of economists about the risks involved.  The truth is that neither the Republicans nor the Democrats heeded the danger signs until it was too late.  For either side to point a finger at the other is juvenile.

With regards to slashing the budget, virtually every economist agrees that deep cuts would actually make unemployment worse in the short run.  Furthermore, far from lowering the deficit, the cuts will actually increase it as more and more people are added to the roles of the unemployed.  The problem isn’t a lack of liquidity, it’s a lack of demand.  Putting people back to work will actually increase demand and begin to grease the gears of an economic engine that has been stuck in first gear and / or neutral for far too long.  But no amount of stimulus will be sufficient to sustain a recovery until the long-term problems plaguing the nation are dealt with.  Tax reform – particularly corporate tax rates – must be addressed for long-term growth to occur.  While Republicans are wrong to believe that spending is the only problem, Democrats are in denial if they believe that merely raising taxes will solve the dilemma.

What we need is an out-of-the-box solution that incorporates the very best of both sides of the political spectrum.  It should consist of the following three steps.

Firstly, regardless of how Republicans feel about the word, further government stimulus is needed and called for to mitigate the devastating effects of this lagging economy.  The Congress should pass President Obama’s job’s plan.  While not perfect, it will help hundreds of thousands of out of work people and stimulate some demand.  Even if it only brings temporary relief, something is better than nothing.  Additionally, the federal government should provide short-term stimulus over the next several years until the economy is on a sound footing.

Secondly, both political Parties need to work together to reform the tax code, and by that I mean not just making sure Warren Buffett pays the same percentage in taxes as his secretary – though that certainly is a laudable goal.  No matter how you slice it or dice it, the painful truth is that America’s corporate tax rate simply isn’t competitive with other industrialized nations out there.  A top rate of 35% is insane.  When Ireland starts stealing your jobs away, you know you have a problem.  While lowering it to 9% is way too extreme, there’s no reason why it can’t be reduced to, say, 15%; lower for companies that build plants and set up offices here in the States.  Such reductions could be offset by eliminating tax loopholes and ending subsidies.

Thirdly, long-term spending must be gotten under control, and that means all spending, including defense and entitlements.  Even with an elimination of the Bush tax cuts in toto and ending the wars in Iraq and Afghanistan, there would still be a budget deficit.  Both political Parties created this monster; both are going to have to do their part to kill it.  For the sake of the country there cannot be any sacred cows.  Revenue and spending must be a part of a long-term strategy to reduce the debt.  Social Security, Medicare and Medicaid, if they are to survive, must be dealt with, even if it means lowering some benefits or applying means testing.  And, finally, the great military industrial complex must get the long overdo shave its been needing ever since Eisenhower issued his warning in his farewell address in 1960.

When we were kids we all learned how to walk and chew gum at the same time.  It’s time our politicians learned how to do the same.  A “my way or the highway” approach is not only bad politics, it’s bad policy.  It leads to the kind of grandstanding and paralysis that has plagued Washington for decades and has earned its leaders the infamy they so richly deserve.

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