Friday, August 5, 2011

The Tea Party Destroys The "Full Faith And Credit" Of The United States

No, in the end they did not actually block a debt ceiling increase, so we avoided a formal default, and the ratings agencies may even yet let us off the hook for an official downgrade. But that does not matter. Since our one-only-in-the-world debt ceiling was unified in 1939, it has had 89 "clean" increases up until this year, despite some noise and huffing on some, and even a delay in 1979 great enough to cost taxpayers something like $10 billion due to a one month technical delay in paying $120 million in interest.

But now we are in a new world. The master of this increase, Sen. Mitch McConnell (R-KY), has made it clear that this is the "new normal." There will be no clean increases in the future, and the tea party has made it clear that Grover Norquist is our dictator; there will be no tax increases to help in meeting the demands to reduce deficits, even though these efforts look to push us back into another recession, 1937-style, all over again. Chinese and other foreign commentators have gotten the message, just as did Moody's, that there is a very severe risk to the full faith and credit of the United States due to potential political gridlock in the Congress, with the worst of this driven by maniacs who refuse to increase taxes and some of whom even think that a default would actually improve the credit rating of the US. The only thing that could have been worse out of this mess would have been if in fact they had failed to raise the damned debt ceiling.

As it is, the New York Times has a lead editorial this morning calling for the abolition of the debt ceiling, a position I have been pushing here since April 19.

14 comments:

JW Mason said...

Chinese and other foreign commentators have gotten the message, just as did Moody's, that there is a very severe risk to the full faith and credit of the United States due to potential political gridlock in the Congress

Um, no they haven't gotten the message, as far as their willingness to hold our debt is concerned.

The markets are telling us as clearly as possible that the sideshow in Washington and the posturing by Moody's have zero impact on the actual demand for US government bonds.

This post is just left-wing confidence-fairyism, and it's just as silly as the right-wing version.

JW Mason said...

there will be no tax increases to help in meeting the demands to reduce deficits, even though these efforts look to push us back into another recession, 1937-style, all over again.

Dude, do you even read what you write here. Tax increases *are* a form of deficit reduction. Tax increase, even on the rich, *reduce* aggregate demand,and make a 1937 relapse more likely, not less so.

It's really remarkable how many smart progressives have completely swallowed the Beltway spin that furhter stimulus can't even be discussed, and the only debate is over which flavor of austerity we should have.

At least Daniel Davis gets it.

TheTrucker said...

JW Mason said...

"Dude, do you even read what you write here. Tax increases *are* a form of deficit reduction. Tax increase, even on the rich, *reduce* aggregate demand,and make a 1937 relapse more likely, not less so."

Yo!! We are HAVING a 1937 relapse due to spending cuts. The recovery in 1938 was because the spending was restored and because the FED loosened up. It is important to observe that taxes were not altered to produce that recovery. Yet the recovery HAPPENED.

A tax on extreme producer surplus or economic rent does not alter any underlying production. The ONLY result is in who gets the money and what that entity does with the money. And at this point we need a lot more infrastructure and a lot fewer personal jets, boats, and swimming pools. Aggregate demand is INCREASED when MORE general labor is employed.

The fact is that extreme incomes _ARE_ economic rent and producer surplus.

JW Mason said...

Trucker,

Cutting spending is worse than raising taxes, as a rule. But raising taxes still hurts AD. Even parasites spend money.

Personally, I'm in favor of confiscatory taxes on the very rich. But insofar as our problem right now is unemployment -- and it really, really is -- the no-tax-increase position is helpful, and the Democrats pro-revenue position is harmful.

We should be capable of having two thoughts in our heads at the same time..

TheTrucker said...

If the rate of tax on extreme ordinary income is raised (extreme wages and bonuses as well as rents, royalties, interest, and income other than actual capital gains) while insuring that capital gains rates (excluding real estate) remain about half of the ordinary rate, then there will be _MORE_ investment and _MORE_ jobs, and _MORE_ AD. This has been the case in all the past history of taxation in this country. You have adopted a religious position as opposed to a rational position. To get a whiff of how wrong you are, consider the horrendous mistake of not allowing the Bush tax cuts to expire, That resulted in a early arrival of the debt limit and the opportunity for the thieves to hijack the nation AGAIN. Taxes have next to nothing to do with businesses and hiring.

TheTrucker said...

I meant taxes on ordinary income have next to nothing to do with investments and hirings. It is the difference between the capital gains rates and the ordinary income rates that spur people to invest. That difference need not be more than 50%.

JW Mason said...

Trucker-

I'm not sure where you;re coming from, but Barkley and I are coming from a Keynesian view of the world in which aggreagte spending determines output and current spending in turn depends strongly on current income. So any government policy that increase current income increases output, and any policy that decreases current income decreases current output -- tho of course some policies have a bigger effect than others.

Relative tax rates have literally nothing to do with it.

Barkley Rosser said...

JW,

Probably I should have explained more clearly, and I don't think we have any serious disagreement. As should be clear, I think the debt ceiling should be abolished or ignored, whatever. The tea party people are not only not going along with this (although some of them seem to want us to default for various reasons), but they demand these massive, contractionary deficit reductions soon, furthermore insisting that they all be due to spending cuts, which they conveniently do not lay out, except for maybe a long run voucherization of Medicare a la the Ryan plan. I am enough of an old Keynesian to think that spending cuts are more contractionary than tax increases, the if indeed we are forced to have some deficit reduction, I would prefer to have some of it in the form of tax increases then spending cuts.

JW Mason said...

Hi Barkley.

Thanks for the reply. I think of myself as an old Keynesian too, and I agree with everything you just wrote. What I don't agree with is including Norquist's no-tax pledge as part of the problem. Of course, if we've got to have either spending cuts or tax increases, tax increases are preferable; but if we've got to have either spending cuts or tax increases, then we've already lost. That's not the terrain we want to be fighting on.

The uncomfortable fact here is that the Democratic leadership is as big a problem as the tea partiers. As long as the alternative to austerity-via-spending-cuts is austerity-via-tax-increases, we're on track for 1937. It's our responsibility as left economists to resist the frame that the only debate is over which flavor of austerity. And that means being clear that resistance to tax increases is *not* the problem right now. If tax cuts are the only form of stimulus on offer, we should take them. The late Wynne Godley, whose judgement I'm sure you respect as much as I do, believed strongly that it was only thanks to the Bush tax cuts that the 2000 recession was so shallow.

TheTrucker said...

As an economist, JW Mason, you might have a point. As a realist you are full of manure. When a government loses the ability to tax, the government has no power over the economy whatsoever; government becomes the hand maiden of the banksters. We are already in that position at present and it is getting worse. Your references to 1937 are bunk for the simple reason that we were on a gold standard at that point and the financial sector was limited as to their power to create money at will. Those days are gone. It is taxation that gives the government's money value and allows the government to have some control over the economy. Without it, all the Keynesianism on earth is useless. The insistence that all taxation is non stimulating is also pig crap. A heavy import duty -- A TAX -- will dramatically improve the internal economy of the United States. In a tariff war, the middle class of the nations with a deficit win and the middle class of the nations with an account surplus _LOSE_. It is a fact that the overall effect is inefficient. But reality and necessity must trump economics.

wellbasically said...

FDR raised taxes in 1937 on capital gains and income.

It's illogical to bring up 1937 and still demand tax increases.

Don't bother twisting yourselves into pretzels to explain why austerity-cuts is good, but austerity-taxes is bad. When I hear that, I know it's just a Democrat saying I want more for government/education/nonprofit/etc no matter what happens because that's where me and my friends work.

TheTrucker said...

The Talking point concerning the tax hike is typical Republican 1/3 truth. What ALSO happened is that the FED raised capital requirements and the government cut its spending, SO THERE WERE 3 THINGS that all happened essentially at once. The clue to causality lies in the FACT that the FED relented and the spending was restored and a recovery ensued even as the tax rates WERE NOT CHANGED.

This is really simple for people who have care to look at all of the stuff as opposed to cherry picking that which supports their preordained conclusions.

Digging a little deeper we find that the tax increase 0f 1936 was actually an increase in the progressive nature of the tax as opposed to "across the board". The tax increase was on those with incomes that in today's dollars would be more than $800k.

Contrast this with the moron Hoover that doubled the tax rates across the board thus causing the great depression. One sure way to cause a depression is to tax the hell out of the middle class. But taxing extreme incomes does not do that.

Barkley Rosser said...

Gosh, wellbasically, why did you not bring up the beginning of the social security fica tax as well back then? Get it: both tax increases and spending cuts are contractionary, but spending cuts are more so than tax increases. Nobody here has claimed that tax increases are expansionary, although contractionary policy can be expansionary if it is associated with an expansionary monetary policy as in the 1990s. As it is, right now, there is very little room for expansionary monetary policy, so forget it.

TheTrucker said...

Why do people believe that tax increases are "contractionary"? I must be missing the boat entirely. Am I measuring the wrong thing? If I measure GDP and government spending is part of GDP then it really depends on whether the private sector or the government sector does the MOST GOOD with the money. If the private sector improves GDP better than the government sector then taxation is "contractionary". But it looks to me like the slurping up and hoarding of money by the private sector is more "contractionary" than the collection of "would be hoarded money" and actual infrastructure and transfer use of the money by government.