I disagree with Hightower.

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Friday, July 22, 2011

lesser of two evils

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I think that it is clear that the long term solution to the debt problem requires a revision of entitlements and an increase in taxes.

In my own middle class case (and those wealthier) it will require both a reduction in entitlements and an increase in taxes. I believe that it can be done so that those who are poor through no fault of their own will not have to "suffer" either.

It would be nice if the two sides could agree on an appropriate balance. That seems unlikely.

So what is the best we can hope for? If there is no compromise then one side or the other will win. Whichever it is we can expect serious consequences which will propel the other side into power and reverse some of what had been done and perhaps we can get a balanced solution that way. Which way would be best? I would say the way that produces the least long term harm.

If the Ds win then we will have continued excessive spending (= more than we take in) even if taxes rise. If the Rs win we have continued inadequate taxation (= less than we spend) even if spending is cut.

If the Rs win the pain will fall on the people, us. (If they win in the form of Ryan’s plan for drastically revising medicare, then the pain would be far enough into the future that there would be ample time - 10 years – before implementation that one could build a consensus for cancelling it by increased taxation.) In any case this route will land on us.

If the Ds win then we will continue the slide into insolvency and the consequences of that will be dramatic. At some point the world will move away from the dollar. Some will say it has already started. When that happens the 3 trillion in American debt that is foreign owned will go on the market. At that point the price of our borrowing will go up. Then our debt will really drag us down.

So if there is no compromise then I would prefer that the Rs win because the consequences seem less severe.

14 comments:

  1. There is a way out of this -- structural political reform. We need to open up the process so that the voices of the American people can be heard. Ordinary citizens (aka independent voters) are locked out of the process. Where will the innovative ideas and solutions come from? Outside the partisan grid. Open primaries, nonpartisan governance, citizen initiative and referendum -- let's continue the experiment that is the American Revolution!

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  2. I do not wish to sound quarrelsome, but there is no "long-term solution" to the "debt" problem.

    Whatever path that is followed must conform to other factors that affect society. Debt, or the lack thereof, is just one feature of an economy and the economy is just one part of the dynamics that define the path that government and society follow. Pearl Harbor and 9-11 are examples of events that transcend and determine things such as debts and economies among other aspects of society.

    Energy demands, overpopulation, destructive weather patterns, immigration, water and food shortages, poverty ... the list is endless and often unpredictable ... all represent factors that can capture the attention of the world or nation for a time. And during that time, the debt and the economy will be something that concerns some, but it will not deter other people from choosing a path that seeks to address the "current crisis" without respect to debts or the economy.

    If the two recent unfunded wars and the persistent ranting about taxes does not demonstrate this clearly then I don't know what it will take.

    The nature of our government is one that acknowledges and adapts to the current focus, sometimes well and sometimes poorly.

    One can only hope that wise voices will prevail more often than not. In either case, as long as the ability of our government to adapt remains intact, we can remain hopeful.

    And having said all of this, I guess I have come down, once more, on the "left" side of a question.

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  3. Well, I think YA stated the problem realistically. At this point the national political scene and the immediate future offer somewhat of a binary choice, either a D solution or an R solution. But, as someone that has not identified with the Ds or the Rs for at least 4 years I think, as Michael points out, things will change.

    For the most part I can agree with Nancy’s comments except the statement that ordinary citizens are locked out of the process. I think ordinary citizens are the process (both the problem and the solution) and truthfully it will fall to ordinary citizens to bring about the changes Nancy suggests.

    Michael and I will have to disagree on whether there is a long term solution. There is an old military saying that “No plan survives contact with the enemy” (usually attributed to Field Marshall Helmut von Moltke 1800-1891). But that only means that our plan must be flexible enough to handle bumps in the road. Indeed, a plan that could not address changes has a poor chance of success – long turn.

    I am unsure how Michael’s reference to “wise voices” and “our government” was intended. If “wise voices” and “our government” means you and me then I agree.

    My long term solution – Either raise the revenue to pay for it or don’t spend it. And yes I am ready to pay higher taxes and accept entitlement cuts.

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  4. Tom,

    I can't speak for Nancy, but I do think that the frequent suggestion heard in political commentary that "lobbyists" have excessive power, as do the rich and powerful for whom they speak, does create a perception that the common person has little influence by comparison. However, it is in the vote that people speak loudest, and that has often surprised me.

    I generally agree with your remarks about taxes and cuts, think the procedure used in Clinton's administration was called "pay as you go" or something like that. It seemed like a good strategy and it was flexible about how the paying was to be structured. I sort of equate "increased taxes," if that's how you plan to pay, to the payment plan on a mortgage. You can stretch it out a little, but you do need to make sure the payments stay within your anticipated budget. Like the future, that's always a little vague unfortunately.

    As to the comment about "wise voices" and "our government" I not sure I qualify as a wise voice or a part of our government, except in the sense of Lincoln, "of the people, by the people and for the people." I am one of the people.

    As to my intent, I just meant I hope that sensible people, in or out of government, help make decisions that serve us all well often enough to keep this "experiment" afloat.

    As an aside, I would think of a "plan" as more of a strategy, and a "solution" as the successful interpretation or application of the strategy.

    Kind of like the Founders laid out a plan for a our government, but whether or not it is a long term solution depends on our successful interpretation and application of their plan ... and on our descendants'. It will always remains a work in progress, hopefully.

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  5. Michael,

    Fair enough. I think that possibly we perceive the “Government” differently. I think of the Government as an extension of the people (voters) and not as a detached third party or entity. Certainly elected officials, or a particular Congress, or a President can perform well or poorly, but ultimately the voters put them there and the voters can remove them.

    In my view of the Government, the responsibility for success or failure ultimately rests with the people. If the government or an elected official fails then it is not some detached “they” that has failed it is the people that put them there, ordinary people, that have failed.

    I’m sticking with the concept that the “wisest voices” must come for the people.

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  6. Nancy,
    I agree with you that some structural changes would be useful including some that you work on. But I don't think that these are going to happen quickly enough to deal with this problem.

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  7. Michael,
    By a long term solution to the debt problem I mean a set of policies that will place in a working balance the government's expenditures and its revenues. I think that it is safe to say that we will always have a debt. The question is whether it will be manageable.

    I think that you are absolutely correct when you say that other things will affect what we do. However, I don't think that that means that we can't deal with the problem. I don't think that we are doomed to "become Japan" and allow our debt to go to significantly above 100% of GDP.

    I do believe that if we let it get out of hand it will drag us down.

    You said, " as long as the ability of our government to adapt remains intact, we can remain hopeful." It is exactly that ability to adapt that I believe is in danger. The debt service burden can very easily drag us down. Our primary foreign lender (China)has indicated concern. We are already "printing money" (when the Fed buys treasury bills)and the BRIC countries are calling for a "new world order" about the use of the dollar as the world's reserve currency.

    Those foreign powers can make some or all of those bills come due at their discretion.

    I, for one, am reluctant to depend on the kindness of strangers.

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  8. Michael,
    Could you tell me a little more about what you mean by "Pay as you go." I agree that it has an agreeably responsible sound, but I thought that it was the system that (for example) GM was using to cover its retirements and medicare is using.

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  9. YA,

    Krugman and others have used the Japan experience of the nineties to the present as an example of the danger of a government being too cautious in response to an economic downturn. I believe Krugman, a clear Keynesian, favored much stronger stimulus packages with more direct attention to the matter of job growth on the theory that we could promote a growing economy which could eventually reduce deficit spending. Our focus on deficits has pretty much taken this path off of "the table" as they like to say. From his perspective, I believe, current trends are very much in the direction of following the Japan model or, possibly even worse, into a full depression.

    I do not think the Chinese are being "kind" at all you silly goose, they just want more golden eggs, which we seem all too willing to supply as we indulge ourselves on their cheap products all the way to 3rd world status; i.e., I think we desperately need a more tightly negotiated trade policy. Our marketplace is currently our strongest asset.

    "Paygo" is described in wikipedia better than I can do, but the catch is that you must pay through higher taxes or reductions in spending. Taxes are more accessible since spending has generally already been approved through prior Congressional authorization, so you must rescind prior legislation and author the new legislation that you are trying to pay for in first place. Of course you can try a power play which overturns vast swaths of legislation without getting into the details. That can have dangerous consequences as we may find out.

    I understand that you would like a plan that manages to restrain the excesses that have accompanied government activities in the last nine or ten years. PayGo was in place from fy1990-fy2002. Over that time, as the Wiki article points out, the deficit was reduced from 4.5% of GDP to 2.4%.

    However, I would not term PayGo as a "solution," but it would be an improvement. It realistically leaves open the option of greater taxes, greater deficits and spending cuts, but its affect over the period in which it was being used seems to have reduced the deficit as a percentage of GDP.

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  10. On Michael’s 8:07 ,7-27 Comment:
    Krugman: As you say he advocates more spending i.e. raising the debt further, but that would make us MORE like the Japanese who have stultified their economy by running up a debt of 200% of GDP. See also http://www.economist.com/node/21524874

    With regard to China, it seems to me that some folks incorrectly conflate trade policy with fiscal policy and they are quite infatuated with the idea that the Chinese need us as much as we need them. Perhaps that is true with regard to trade. However, I think that when it comes to the debt, the belief that the lender needs the debtor as much as the debtor needs the lender is a theoretical construct which is invalid unless there is only one place that the lender can put his money. The Chinese can buy German bonds, gold, etc. Placing that kind of power over us into the hands of a competitor is perhaps even worse than depending on the kindness of strangers. Responses that I have had to this point vary from silence to name calling.

    On paygo: Its merits are debatable at best, see http://www.politifact.com/truth-o-meter/statements/2010/feb/10/nancy-pelosi/pelosi-touts-democrats-revival-pay-you-go-budget-r/ . During the first half of the decade of the 90’s the politicians cut spending and raised taxes significantly. I expect that that is what produced the swing from 1990’s 4.5% deficit to 2000’s 2.4% SURPLUS (though it did drop back into deficit with the 2000-01 recession). As soon as the flow of money was cut off with the Bush tax cuts Congress abandoned paygo.

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  11. YA,

    Spending that does not address jobs and the health of the economy would increase the similarity between the current economy and the Japan/nineties model, but I believe Krugman has emphasized that spending should specifically address those needs. I don't think he would approve of spending that paid no useful attention to either jobs or the health of the economy. Obviously, if the economy improves, it becomes more feasible that the deficit can be reduced.

    I imagine China, like most other investors, invests where they believe they can get the best return although they might have other motives I suppose. The US has generally been one of the best places to invest. If they find Germany a better investment then I expect they would invest there, but all of those investors the Chinese would displace by going into German investments would then be looking for a place to go with their investment funds.

    I would think that the greater risk would be if they cashed out all together, but I don't pretend to know how or if national players try to manipulate other nations. They could no doubt.

    The decrease in the deficit in the nineties certainly owed a lot to the increase in taxes, but others also attribute much of it to the booming economy. I would think that at the very least PayGo, as it existed then, was not a significant deterrent to the decrease in the deficit and it is possible that it was helpful.

    Your article describes shortcomings that are specific to the 2007 version of PayGo. Obviously, a proposal that is full of holes would not be helpful, but I was just expressing an appreciation for a system that appeared to have contributed to a decrease in the deficit during a time when it actually did decrease. I haven't done a study of the variations of PayGo systems tried in the past.

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  12. Very rich and valuable dialogue here - clearly this is a group of discussants who care what others think -- how refreshing!

    Ref. YA "I agree with you that some structural changes would be useful including some that you work on. But I don't think that these are going to happen quickly enough to deal with this problem."

    I would submit that there won't be a solution at all without political reform. I'm not an economist, but as an American worker for the better part of 40 years, I think I can recognize BS and political manipulation when I see it -- in this case the political parties are telling us that they hold the reigns of this economic wild stallion and we should just step aside and let them haggle each other to death until they agree on the next set of failed economic policy. I don't think the American people are buying it. So in spite of our President's pleas to Congress to come to a bi-partisan compromise, we would have swift justice indeed if ordinary people - the anti-partisan independent thinkers in the country - were brought to the table. How long will that take? Who knows? I'm sure there were folks who thought it would be quicker to negotiate with King George, but future Americans were busy creating a new form of political life -- American democracy. Time to have another look at how to get from A to B! Personally I don't see global economic stability coming out of the political machinations of the 112th Congress.

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  13. Michael (July 29 comment)
    I think you are right that Krugman prefers spending like the recent stimulus which was for those “shovel ready projects” that Obama later said did not exist. Its supporters said that without that stimulus unemployment would have “gone over 8%”. (As I’m sure you know, WITH that stimulus unemployment went over 9%.)


    I agree with you that China will do what it thinks is in its best interest. Fear is a major factor in determining what is the best investment. Our treasuries have always been the “best” because we have always been seen to be reliable and responsible and able to repay. I think that a few more “10% of GDP deficit” years will cause a lot more of the worry which has already begun. It is not just a matter of the assets going from one place to another. If assets move away from us and toward Germany (or gold or whatever), then their value will go up and (for bonds) their interest rates will go down and our rates will go up. If and when that happens the cost of the debt could be overwhelming.


    I would agree with you that paygo probably didn’t hurt much. But I think that the main point is that it “worked” in the nineties after tax increases and spending cuts made the job of reducing deficits much easier. When the Bush tax cuts slowed up the income flow in 2002 Congress dropped paygo like a hot potato.

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  14. Which does make one suspect that the 2002 version of paygo was making free spending a bit more difficult ... otherwise why drop something that gives you the appearance of being careful and prudent in your spending and taxing policies while not restraining them at all in reality?

    I predict that the Chinese will have a significant generational problem similar to that of the Japanese and what we see in our immigrant population and in the families of our successful professionals: The hunger to succeed and prosper often diminishes in succeeding generations once one generation has achieved success.

    But that won't help in the near term.

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