After I wrote about federal spending last week, the press was filled with new ideas about tax change and tax reform. On one level that sounds good. Many of us have been harping about a lack of attention to the tax side. On another level, this cornucopia of tax ideas warns of a continued breakdown in Washington and the increasing potential for a fiscal meltdown.
Consider the guy who gets in a car accident and damages his 1988 Vanagon pretty badly. He takes his pride and joy to his favorite mechanic, Claus. Claus wrings his hands and tells the guy, let’s call him Jason for fun, that the bill will be large because he has to fix everything from the brakes to the rolled and pleated cream and crimson upholstery. Jason luckily is covered by the Deutsche Hefeweizen Car Insurance Company and tells Claus to go ahead and do the work. Imagine how Jason felt when Claus called him and told him the car is ready. When Jason arrived he found that the front end was fixed but nothing else. Claus explained that if Jason is satisfied, he would work on the rest of the car. Imagine that Claus and Jason go through this same thing each time Claus fixed one more part of the car. Finally Jason, usually a mild-mannered and thoughtful fellow, began screaming at Claus – DO NOT CALL ME AGAIN UNTIL THE WHOLE D___CAR IS FINISHED. I CANNOT EVALUATE YOUR WORK AND KNOW MY CAR IS FIXED UNTIL ALL PARTS ARE WORKING AT THE SAME TIME.
I think you get the point. Claus might take great pride in his brake work but Jason cannot really evaluate the brakes until he can actually drive the car forward and step on the brake pedal. It would also help to check the brakes after the steering system is fixed and he could see how the car braked while turning.
A sequential method is good for building a house. First you dig the hole then you lay the foundation, etc. But some things are best done and understood simultaneously. I think our fiscal system is broken. It behooves some politicians to amaze us with one partial solution after another. But the truth is that you cannot really evaluate a spending plan without knowing how you are going to finance it. Think of all the fiscal policies that have been dribbled out by the President or Congress lately. We fix employment one day with a continuing payroll tax reduction. We make markets more efficient the next day by reducing corporate tax rates. We raise the tax on dividends and capital gains another time. One policy is all about fairness. Another one is about efficiency. Another pretends to impact growth. Hollow words talk about medium-term budget restructuring. All these policies have implications for national fiscal health in the near-term. All will impact it in the long-term. We cannot evaluate the brake fix without the steering. We cannot know the impact of a spending plan without a revenue fix and tax reform.
I can just see those politicians sitting around their favorite watering hole in DC drinking $20 Manhattans laughing with each other about how stupid we voters are. Let’s hit the voters with housing reform on Tuesday, says Senator 1. Yes, and then on Wednesday we will save the planet from killer bees chortled Senator 2. Senator 3 chuckled that Thursday should be when they publish the three million page document on fair taxes. They toast the voters and then text their chauffeurs to take them to the next stop for donuts.
Okay I make fun but the sad truth is that this piecemeal approach is about nothing except the manipulation of us by politicians. They divide us and we happily line up in our respective camps while they go to the bank.
Talk about a Ponzi scheme. These politicians vote for schemes that have done nothing but make things worse. I don’t care whether you talk about the war on poverty or on Afghanistan – the policies are not raving successes. Then they pit us against each other when it comes to another round of policies that don’t work. When the last round of policies clearly don’t work, they play a game of blaming each other and gain even more power to do equally bad policy. The game is nearing the end and we citizens are left with a mess.
I can hear you now. Larry – get real. You expect these politicians to actually sit in one place long enough to come up with a comprehensive economic plan for the economy? You want them to deal simultaneously with a number of the most important fiscal tools that could make progress towards advancing our goals for employment, economic growth, poverty, energy, and security? You want them to stop playing the bait and switch game?
I agree that what I am saying sound really crazy. I want our politicians to have a plan to improve our country. I want our politicians to recognize that there are tradeoffs when it comes to making progress on important goals like growth and poverty and environment. I want our politicians to stop playing cheap games that artificially create animosity between the rich and the poor, the young and the old, and the wage earner and the owner. I want our politicians to lead in a way that raises our aspirations and creates realistic hope that we can succeed in an increasingly competitive global economy.
Okay, so maybe I am engaging in some early morning JD with my raisin bran. But we do need to recognize that the current approach to policy during an election year is just going to make things worse. Worse yet is what has happened to our expectations. Notice that it sounds crazy when I propose that our politicians act as leaders and statesmen. Have we really come so far (down) that we can only expect crass and selfish behavior of our political leaders? This is a great country with great people. We should expect more.
More should not be so much to ask for. Most of it we know already. Below I will try to prioritize some things that most of would agree with. If you don’t agree that gives you something to comment about.
(1) Send a signal to ourselves and the world that our temporary deficits and debt position must be confronted immediately. That means we must reduce spending and increase tax revenues. We could always sell the Grand Canyon to the Chinese but I am not suggesting that yet.
(2) Don’t let a solution for deficits/debt jeopardize our fragile growth position. By that I mean that too much austerity too soon might be a bad idea. So restructure the budget numbers in a gradual way. They can argue about the speed of the solution. But at the end of the day come up with a temporal plan.
(3) Ask the appropriate czars to move more quickly to finding ways to deal with housing issues, with reducing excessive leverage, and with using the legal system to penalize the bad guys.
(4) When dealing with government spending and tax revenues, leave no stone unturned. Allow no sacred cows. Spending restraint will not get anywhere if Social Security, Medicare, and Medicaid are taken off the table. Similarly tax revenue enhancement cannot be done unless the entire realm of tax rates, deductions, loopholes, and credits are reviewed together.
(5) If we evaluate the efficiency or the fairness of every change individually we will never take the first step. Instead we should take everything together – all the ideas above – and then make a summary statement about the overall impact on employment, growth, poverty, income distribution, etc. If one multifaceted plan fails to muster enough support, then they should adjust the plan until they get something that appears to be better when it comes to employment, growth, poverty, income distribution, etc.
If some of you have gotten this far you might be screaming – Larry – are you crazy or drunk? Can you really expect Washington to do something like this? Humbly I beg you to notice that the piecemeal approach does not work. It is taking us to the vigilante’s abyss. America does not face an inevitable decline because of the external meanness of China, PIIGS, OPEC, Terrorists, etc. As Pogo said, “We have met the enemy and he is us.”
We have the firepower to adopt a comprehensive plan. We already believe nothing will get done this year because it is an election year. Wouldn’t it be nice if some folks in Washington took this year to work hard on a perhaps flawed but comprehensive plan that addresses our real problems? Isn't that what we pay them handsomely to do?