Man's mind,
once stretched by a new idea,
never regains its original dimensions.
Oliver Wendell Holmes, Jr.
The $1T Coin Nonsense Finally Done: Thumbs UP!
This blog has devoted a considerable amount of space debunking the idea that the Treasury could use a bill allowing it to mint platinum coins of varying worth to create a $1T coin, effectively having the Fed directly monetizing deficits (whether we are talking about cashing the coins for other currency to pay bills, thus avoiding new Treasury debt issue, or retiring bonds to make room for new bonds under the cap) The Fed monetizing the debt is fundamentally unacceptable and constitutes moral hazard: why exercise spending restraint?
The Obama Administration, which apparently thinks Obama was elected under a collect-two-years-of-taxes-get-one-year-of-spending-free deal, has the unmitigated gall to lecture the GOP on paying the bill. Remember during the campaign when characteristically "ever-classy" Obama made mockery of alleged "Romnesia" (rated a one-Pinocchio by WashPo, sort of the political version of the Razzies). What are we to make of "Obamanesia"? (No, it's not his paternal family's ancestral homeland in Kenya...) Let us go back to the summer of 2011:
Courting confrontation and compromise alike, House Republicans on Monday shrugged off President Barack Obama's threat to veto their legislation to cut federal spending by trillions of dollars.
The Republican bill demands deep spending reductions in exchange for raising the nation's debt limit. But Obama will veto it if it reaches his desk, the White House said, asserting the legislation would "lead to severe cuts in Medicare and Social Security" and impose unrealistic limits on education spending.So when we hear these provocative words:
White House press secretary Jay Carney said in a statement on Saturday that there are only two options for dealing with the debt limit: "Congress can pay its bills or it can fail to act and put the nation into default...The President and the American people won’t tolerate Congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy," Carney said. "Congress needs to do its job.”Big words coming from a White House which has done nothing to jawbone the Senate Democrats, whom control the Senate, from even passing its own mandated budget in years (that's leadership for you), and even its own budget last year FAILED TO GET A SINGLE VOTE (INCLUDING DEMOCRATS) LAST YEAR FROM THE SENATE OR THE HOUSE.:
Sen. Jeff Sessions, Alabama Republican, even challenged Democrats to point out any errors in the numbers and he would correct them — a challenge no Democrats took up. The White House has held its proposal out as a "balanced approach". It calls for tax increases to begin to offset higher spending, and would begin to level off debt as a percentage of the economy by 2022. It would produce $6.4 trillion in new deficits over that time. By contrast the chief Republican alternative from the House GOP would notch just $3.1 trillion in deficits, and three Senate Republican alternatives would all come in below $2 trillion.The GOP House has passed budgets, and the referenced budgets cut spending far more than Obama's (un)balanced approach which substitutes economic growth-attenuating tax hikes for politically courageous spending cuts.
I am NOT speaking here as a partisan shill. (In yesterday's post, I coined a term for my partisan vision, which I term "Free Federalist", focused on free market/free trade principles and minimalist bottom-up government.) But this soundbite of the GOP holding the nation "hostage": Obama and his partisan cronies are knowingly transferring the burden of today's spendthrift government onto the nation's children and grandchildren whom will have their own government burden, which I find absolutely reprehensible. What's next, stealing candy from a baby? Quick, kiddies, hide your piggy banks... Only not in Switzerland, because the IRS will track it...
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| Democrat Stealing Candy from Baby Courtesy Strangestbrew |
Who do you believe: the House which actually passes a constructive budget or a passive leadership and habitually procrastinating President whose idea of cuts is deferred accounting gimmicks (e.g., cuts in planned budget increases), not thinning the bureaucracy, freezing compensation, shuttering redundant facilities, privatizing functions, selling assets, narrowing programs' eligibility, capping transfer payments, etc.
Incidentally, the nonsensical Keynesian policy objections behind Obama's "broken window" economics that a government living within its means is harmful to the economy are sharply contradicted in a recent essay from Robert Murphy. A few excerpts (note: Christina Romer, second excerpt, was a key Obama Administration economist):
Padovano and Galli (2001), for example, used data for 23 OECD countries from 1951 to 1990 and found that high marginal tax rates and tax progressivity were negatively associated with long-term economic growth.
Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent. (Romer & Romer 2010)
Around half of the fiscal consolidations in the EU in the last 30 years have been followed by an improved output growth performance in the short term
By the mid-1990s, the Canadian federal government had been running deficits for two decades, with one third of federal revenue being absorbed by interest payments. . In just two years, from 1995 to 1997, total federal government spending fell by more than seven percent, while the budget deficit of $32 billion (four percent of GDP) was transformed into a $2.5 billion surplus. There were also tax increases, but the ratio of spending cuts to tax increases was about five to one. Canada's federal government ran 11 consecutive budget surpluses, causing the debt-to-GDP ratio to plummet from 78 percent in 1996 to 39 percent in 2007. In the decade after reform, Canada out-performed all the other G7 nations on economic growth, investment, and job creation.On the last point, remember in the recent past when a Canadian dollar was worth less than a US dollar? I checked Google today: "1 US Dollar equals 0.98 Canadian Dollar"
Disagreeing With a Favorite Economist
Any regular reader knows I frequently cite George Mason/Cafe Hayek free market economist Don Boudreaux and in particularly his signature pithy letters to the editor and others. I have additionally plugged his recently published letters collection "Hypocrites and Half-Wits", available from Amazon.
I have also plugged the idea of a VAT in the past on this hlog (you can think of a VAT as a layered consumption tax assessed at levels through the production and sale of retail products). Most progressives have a knee-jerk reaction against the idea: it's "regressive" (unduly impacts lower-income) and also see it as adversely affecting aggregate demand; many conservatives see it as a slippery slope of tax increases where spendaholics like Obama have a hundred different ways to spend every nickel the government extracts.
Why would I consider a VAT? First, let us agree that taxes are a form of legalized plunder. I don't want to maximize the government's aggregate theft: I want to lessen its burden on the economy. Income taxes, particularly progressive ones, adversely affect the supply aide of the economy: they are penalties on labor and investment; on the other hand, we also see subsidies on the consumer side of the economy (e.g., mortgage interest, healthcare, etc.) I would like to see more balanced flat-rate spread of any necessary minimal tax burden (including the 47% of workers not paying into government, with skin in the game for deficit reduction). The VAT also has status under international trade rules.
Do I want to see the Pickpocket-in-Chief to get his greedy fingers on the money? Of course not! In addition to lowering income tax burden, I would like to see part of the proceeds going to retire Treasury debt.
Art Laffer, the well-known supply-side economist behind Reagonomics, has a tax prescription I find persuasive:
In addition to a hands-off approach to economic policy, Laffer prescribed a simplification approach to taxation. He said he would adopt the platform of 1992 Democratic presidential primary candidate Jerry Brown to “eliminate all federal taxes.”
“And in their stead have two flat rate taxes. One a flat rate tax on personal unadjusted income, and one a flat rate tax on business net sales,” also known as a value-added tax. “If you made it down to full employment…you could more than match all the federal revenues at a tax rate of about 12 percent,” Laffer said.
The full Laffer prescription calls for five things you’ve got to do to have a truly prosperous economy. “You want low rate flat taxes, spending restraint, free trade, sound money, and you want minimal regulations that do serve the specific purpose” without causing unwanted collateral damage.Okay, where does Don fit into the discussion? Because he wrote a relevant short letter to a Fox Business personality:
Here’s a letter to Fox Business anchor Melissa Francis:
In your interview yesterday with the Heritage Foundation’s Curtis Dubay you expressed concern that Americans might soon be hit with a European-style value-added tax (VAT). Your concern is justified. As Adam Smith observed long ago, “There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”*Yeah, Don, we get it: politicians love to spend other people's money, but you could make this statement about any new tax as well. The VAT is usually discussed in terms of overall tax reform, not simply an add-on.
Musical Interlude: My Favorite Groups
Richard Carpenter featuring Dusty Springfield, "Something In Your Eyes". Karen passed before she could lay down the vocals for Richard's original song. (My biggest criticism of the group after 1973 is their undue reliance on remakes; ths group was too good to be a cover band. I had a similar criticism of Ronstadt whom then knocked me out with "How Do I Make You". Dusty Springfield is the essence of blue-eyed soul: great choice of a guest vocalist.) As a bonus track, I'm embedding my favorite Dusty track; I don't care for the song's message of a woman willing to settle for whatever time she can have with a man she desperately loves (I think women deserve better), but the arrangement is memorable and Dusty's vocals are virtuoso. I don't even listen to today's pop music; finding something listenable is like panning for gold.
