This is Part Two of a critical review of The National Journal’s Debate on "Our Fiscal Future" between John Podesta and Douglas Holtz-Eakin with Jim Tankersley moderating, at The George Washington University’s Jack Morton Auditorium. This part provides more observations and evaluation on some of the propositions offered by Holtz-Eakin and Podesta.
H-E: Eliminating tax cuts for the rich will cost 1.5% to 2% GDP annually.
Me: This one is really hard to believe. The tax cuts for the highest income people would average about $70 Billion per year. The multiplier associated with these cuts is only $0.29 on the dollar. So destroying these financial assets through taxation will cost the economy about $20 Billion annually. As a percent of current GDP that amounts to 0.14 percent, not 1.5 to 2 percent. So, I think we need to view this claim of Holtz-Eakin’s with a big dose of skepticism. The question is, why didn’t Podesta question it?
H-E: It’s not Obama’s money, it’s theirs! The Government is a redistributive engine!
Me: This is a conservative article of faith. But looking at it from a more objective point of view, currency creation is a monopoly of the Federal Government. All of it originates with the Federal Government. It is distributed to people, corporation, and other institutions according to a framework of laws that accords property rights to the recipients of currency.
These property rights aren’t absolute, they originate in due process of law, and they are limited by legal frameworks and processes. Without such a framework, property rights would not be operative at all, but possession of property would exist only because the holder of property had the physical power to continue to hold it. It is part of the legal framework of our society that the Federal Government has the right to tax and destroy financial assets, that is to take some financial property, in accordance with due process of law in order to fulfill public purposes. This taking of property is not arbitrary it is done according to law and in the context of a political democracy where citizens authorize the legislature to make rules that govern these "takings" by the Government.
So, no “owner” of currency or financial assets has absolute ownership. People and institutions “owning” currency have no absolute rights in that currency, and the Government can repossess currency (tax) to fulfill its legislatively approved purposes. No, the money doesn’t belong to Obama; but the idea that it may be subject to income or other kinds of taxation is firmly enshrined in law and custom. In fact, taxation is necessary to give a fiat currency its value in the first place.
As for the Government being a redistributive engine. You bet it is! But markets are redistributive engines too, and when they are non-competitive, and manipulated and governed by fraud and insider trading, they are an illegitimate, even criminal redistributive engine, as we have seen in the past few years.
Also, the legal framework we create to regulate commercial transactions to a greater or lesser degree itself results in redistribution. The framework put in place by The New Deal in the 1930s eventually produced both great prosperity, and a much greater degree of economic equality than we have today. Conversely, the legal framework that began to develop in the Carter Administration, and that was firmly set in place by Reagan/Bush41, strengthened by Clinton and Bush43, and so far maintained by Obama, has produced substantial destruction of wealth among the middle class in the past few years, and increasing inequality over the whole period of these presidencies. It has served us badly in the way it distributed wealth, and it now must change in the interests of justice.
So, yes, Government, in combination with market dynamics, is a distributive engine, and for the past 35 years it has been redistributing economic rewards in the wrong direction. It is time to right the balance. A silent “class war” has been fought for 35 years now, by the rich and the large corporations, against the poor and the middle class. It is time for the people who are victims of this one-sided war to begin fighting back; to acknowledge that "class war" is what is going on, to fight that war, to win it, and to adjust the legal framework, so that the balance is redressed toward greater equality. It is time to end the days of plutocracy and to bring back democracy to America.
H-E: Deepest unfairness is not keeping Government small!
Me: Holtz-Eakin is given to pronouncements of articles of faith from conservative ideology. The notion that Government should be kept small was outdated in Teddy Roosevelt’s time when he went to war against the giant trusts. It was outdated in FDR’s time when he tamed the interests controlling economic life in America. In these days of giant global businesses and international cartels it is absolutely ridiculous to think that small government could possibly produce fairness to individuals. Americans need big government to represent it against the great concentrations of economic and private political power we see all around us, because only big government can have the power and resources to make large corporations obey our laws, and treat individuals fairly and with respect.
It is either big government and heavy, careful regulation of the corporations, aand the markets, or breaking up the global corporations, scaling then down to a size that a small government can regulate, and making sure that they never grow beyond a certain point again. But we cannot have a small Government and huge global corporations and expect to have liberty and justice too. That is just dreamland.
Our problem is not big government. It is that the Big Government constructed by the New Deal and its successors was corrupted by neoliberal ideology, lack of enforcement of regulations, repeal of essential regulation, and control of our regulatory institutions by people who were appointed to gut them, and who refused to fulfill their legal responsibilities while in office.
Our big Government is broken. True enough. But the only reasonable way forward is to fix it; not to find refuge in small government, 19th century liberal, fairy tales. The deepest unfairness is not failing to keep government small; it is a weak and ineffectual government that doesn’t have the power or the willingness to see to it that corporations and the wealthy respect the rights of Americans and treat them fairly.
H-E: The top two tax brackets will have to go as high as marginal tax rates of 80% if we can’t borrow money as we are now!
Me: We don’t have to continue to borrow money in order to deficit spend. The Government has the constitutional authority to create all the money it needs by spending; i.e. by marking up private sector accounts. We are not running out of keystrokes to accomplish this spending. Debt issuance is a policy choice. Not a necessity. If the bond market doesn’t want to buy our securities at the price we’re offering them for, then we can have the Fed buy them at whatever interest rate we think is appropriate. The interest the Fed earns on these securities gets remitted to the Treasury minus the Fed’s cost of processing.
So, if we want to, we can issue no more debt, or alternatively only debt that will be bought by the Federal Reserve at an interest rate of our choice. There will be no high interest burden and there won’t be any debt that it is necessary to pay down or off. There will only be the permanent recycling of debt at very low or no interest. So there will be no need to raise marginal tax rates to 80% as Holtz-Eakin claims.
But even though there is no need to tax at 80% marginal tax rates to achieve fiscal responsibility or sustainability, we may still want to tax at those marginal rates, if that’s what is necessary to create a more equal society. In American history, there have been two central values: individual liberty and equality of opportunity. The loss of a measure of economic equality is now threatening both those great values. If we want to restore them we have to bring the great engine of big government under democratic control once again, and begin to level play fields, so that dangerous concentrations of bureaucratic power, either private or public, are neutralized, and every American has the opportunity to lead a fulfilling life.
P: Tax reform is very hard to do, has very low prospects!
Me: John Podesta is very much involved in practical everyday politics. He understands both Congress and the Executive branch very well, and the limitations of what those institutions could do in the last 20 years or what they can do today. But how good is he at predicting political change? For example, did he anticipate the rise of tea party candidates and their success in this primary season? Can he predict what the big political picture will look like in two or three years? I doubt it!
Clearly if the future political environment is like it is now. The prospects of tax reform will be small. But one thing we do know is that we live in a political economy that is being buffeted by the winds of change. There’s an appreciable danger of a double-dip recession, and there’s a widespread feeling in the country that the Congress, and especially the Senate, is dysfunctional, and that this institution must change. If it does change., if the filibuster goes, then the political context will change quickly, and tax reform will then be much easier.
But before, Podesta and Holtz-Eakin wish for tax reform, perhaps they ought to give a little more thought about what kind of reform it may be. Based on things said among the elites, many seem to feel that we should be adopting a Value-Added-Tax (VAT). This idea is very, very unpopular among the public, however, and if democratic control begins to come back, the reform we may see won’t be a VAT, but a much more progressive income tax system than perhaps they’d like to see.
H-E: If we go down the road we’re on, the best case is stagnation; the worst case is collapse and then stagnation!
Me: Well, the road we’re on is a bad one. But the road Holtz-Eakin favors is even worse. The austerity he recommends is the true path to collapse and then stagnation. It is the Hooverite path, and it is already bringing suffering and poor economic performance to the PIIGS in the Eurozone.
H-E Entitlements have to be on the table. It’s that vs. nothing!
Me: That assumes, of course, that we have a deficit or a debt problem. As I argued in Part One of this series and in other places. This idea is a myth, a fantasy, and it betrays ignorance of the workings of a fiat currency system. Most of what Holtz-Eakin says about the economy applies very well to economies on the gold standard, economies without control of their own currency, or economies with substantial debts owed in a foreign currency. But, very little of what he has to say applies to a Government sovereign in its own fiat currency, like the United States.
P: The new health care reform act changes the way we deliver health care.
In you dreams, John Podesta. The new health care reform is mostly about insurance coverage. It does have provisions that could lead to more effective and efficient health care delivery, if the providers cooperate and the act is well-administered, and if the claims of the Administration about how many additional people will be covered by insurance prove true.
However, the lack of insurance cost controls suggests that people will not be able to afford insurance once the program really goes into effect in 2014. Also, it’s doubtful that the vast expansion of Medicaid can be handled financially by our revenue-starved states even with Federal Aid specified in the act. In addition, CBO’s projections of money saved are unlikely to occur simply because CBO projections are unreliable more than a few years out.
All this means that we are unlikely to have much change in how we deliver health care, except, perhaps to have further deterioration in the way we deliver it across the board. The celebratory attitude of John Podesta about how the act is going to bend the cost curve looks to me like one of the many “happy dances” the current Administration and its supporters have done about its very limited, and highly compromised achievements. All of which have been carefully constructed with an eye toward compromise with every special interest that could possibly squawk about the legislation it passed.
Finally, a more general word about this whole debate on our fiscal future. In spite of their ostensible disagreement which framed the debate, both Holtz-Eakin and Podesta agreed that fiscal responsibility will, in the coming years, be viewed from the standpoint of our success in stabilizing the debt-to-GDP ratio. That is, fiscal responsibility for both is not about using the Government’s fiscal policy capabilities to create full employment, end poverty, create a first class educational system, rebuild our infrastructure, create a new energy foundation for our economy, or any of the other substantive public purposes that Government fiscal power can be used to facilitate, enable, and even achieve. No, from their point of view we will be fiscally responsible if we see to it that the debt-to-GDP ratio stabilizes at some unspecified level rather than continuing to grow.
From my point of view however, this is not fiscal responsibility or fiscal sustainability. I think, instead, that fiscal responsibility means using the Government’s fiscal power to help achieve public purposes Moreover, I don’t think the debt-to-GDP ratio level is very relevant to fiscal responsibility at all, simply because that ratio has nothing whatsoever to do with the Government’s capability or authority to spend.
A government like ours that is sovereign in its currency has no risk of solvency. It has the same power to spend at a debt-to-GDP ratio of 170% as it does at 30%. What it does risk is inflation, if its spending outruns the productive capacity of the economy in a given time period.
The US Government can spend quite a lot right now before it runs up against that limit since we are operating somewhere around 70% of our productive capacity right now. But, if we do really want to risk inflation, then all we have to do is to follow Holtz-Eakin’s advice, and drive our economy into a depression deep enough to destroy some of our productive capacity and real rather than just financial wealth. Then when our Government does finally turn around, and tries to mimic FDR rather than Hoover, it will find it much easier than it is now to outrun our diminished productive capacity with its spending, and to cause inflation.
In other words, apart from the unnecessary human suffering, there is another potential cost to listening to Holtz-Eakin’s austerity nostrums, rather than to those who want to create full employment within 6 months, and that is that an adventure in Austerianism might well leave us with much less pre-inflation room than we have now to life the economy with Government spending.
I’m not saying that we won’t be able to create full employment later on if we need to. We can always do that, but the room for injection of financial assets into the economy by the Government can be much less, so that the end result of Government spending is less savings for the private sector, and a longer recovery time than we would have had if we had acted in the right way from the beginning. In my view we have already wasted time with the Administration’s very poorly structured stimulus with its overabundance of tax cuts, and its relative avoidance of higher multiplier initiatives to create demand. At this point we ought to wholly ignore the Austerians, and go right to legislation that will create full employment in a matter of months.
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).