Friday, July 15, 2011

A Solution That's Better Than No Solution!

Well, it appears the cooler, calmer heads of the Senate might have prevailed in finally finding a solution to this debt ceiling impasse - caused by a crazed offshoot of the Repuglican party called "Tea Baggers". As noted in the earlier blog on this, these people have no interest in any kind debt or controlling it - other than to score ideological points. It is interesting here that even Republicans of various stripes, as well as The Wall Street Journal (in their editorial 'Debt Ceiling Hari Kari') two days ago) are warning the Teepee crowd not to overstep and to cease being unrealistic.

Anyway, the solution evidently being worked out (by Senate Leader Harry Reid, along with R-counterpart Mitch McConnell) behind closed doors would allow Obama to raise the debt ceiling on his own over the next two years. Each time he does it, however, the congress (House) will get to vote aye or nay on his debt ceiling increase. The Repub House almost certainly will always have a majority of 'Nays' but they will need enough to overcome an Obama veto - which is what he will be able to use if the votes are top heavy against him.

The bad part of this deal is that it's planned with $1.5 trillion spending cuts and absolutely NO tax increases! In a way, this is like being given a gift box of chocolates but they are all laced with laxatives. While the deal itself avoids the calamity of a default, which would make our situation worse than the great recession (and therefore be a gift to all citizens), the lack of any revenue increases makes it unlikely the aggregate demand will increase and thus, the economy will remain in a state of doldrums with 9% or more unemployment.

As I've repeatedly said until blue in the face, a nation can no more cut its way to prosperity than a runner can cut off his right foot and expect to run faster. It just doesn't work that way. For most Americans, so inbred is their tax phobia - they've no idea that it's actually TAXES that help plump up the national savings and make it more likely for businesses to invest in new jobs, plant etc. The reason is simple: with higher taxes the only ways to limit the exposure are via government programs that award business tax credits for business-employment investment. Without that 'stick' the carrot only will only see businesses grabbing for every advantage but no investment in labor. Why would they?

Thus, a debt deal - while welcome - is no panacea. Building a fiscal solution only on spending cuts is simply a fool's errand, given the nation's population is increasing all the time and these expanding needs have to be matched with services: hospitals, highways, doctors, health care, schools, etc. So far, the investment has been way too one-sided with more than $1 out of every $2 spent on places like Iraq and Afghanistan instead of at home - shoring up our crumbling infrastructure for example.

Thus, it wasn't for nothing that Oliver Wendell Holmes correctly stated:

"Taxes are the price we pay for a civilized society."

And he wasn't far wrong. Any survey of nations that are low on revenues, and keep it that way - for whatever reason - show uncivilized facets, and poor standards of living. Contrary to Repuke spin, a higher standard of living is contingent on a higher collective tax base, not the converse.

In the 1970s and 1980s I was in two nations that suffered from low revenues, one which solved the problem and the other which didn't.

In 1978, while in Guyana, I beheld what chronically low revenues could do (this was a result of over-nationalizing all the country's primary industries - by P.M. Forbes Burnham.) The place was a mess, with barely any local food stocks, and hardly anything on retail shelves. Worse, the people didn't have the money to spend. The demand side of the economy had been so ignored that the government had no solutions other than to try to keep borrowing, but the loan interest was now almost more than they could afford. The streets were full of potholes, and rice was about the only staple food that people could still afford. Meanwhile, for the three days I was there, power shut downs were the norm, toilet paper had to be rationed, and the airport restaurant carried only one meal: chicken noodle soup.

In 1987-89, Barbados was in a similar mess after trying supply side idiocy. It essentially bankrupted the country - whose newly elected leaders (in 1986) believed they could try Reagan Style tax cutting in Barbados. By 1990 the situation was so serious that the nation was in a similar situation to the U.S. now - borrowing nearly 50 cents for every dollar earned. Worse, the unemployment consistently hovered near 18%.

A new government was elected in 1994 and immediately implemented not only increased income taxes, but new VAT (value added taxes) on a host of retail products, even foods. Did the country collapse - according to supply side doctrine? No, it prospered! New industries popped up, including offshore banking, and the tourist industry itself was revived. Unemployment dropped below 10% for the first time in more than twelve years.

On visiting last year, I beheld ever more new investment coming into the island state which had never before been seen. That included new beach resorts and time shares. The latest venture capital is being invested in the St. Joseph Hospital - as a base for a medical tourism industry expected to bring in $200m a year.

NONE of this would have been possible without raising the revenue needed.

I do hope, if this new debt deal does pass, that Obama will understand we need to have a balance to this spending cut over-emphasis and that it must come next year.

To that end, he needs to retire ALL the Bush tax cuts, not just for the wealthy! As the WSJ noted yesterday there just isn't the money to bleed it all from the rich. The middle class will have to sacrifice too. Eliminating all the Bush tax cuts from next year will save nearly $3 TRILLION over the next decade! That is, a reduction of $3 trillion in our national debt that would otherwise be on the ledger. Retiring merely the tax cuts for the wealthiest will save only $700 billion by contrast.

To me, this is a no-brainer! Let's stop the cheap, tax cut political pandering for once, and explain to people - like the adults they are- why it is that higher taxes work to their benefit. If they understood that they're more likely to preserve their future benefits - including Social Security and Medicare- they will be less likely to scream for tax cuts at every turn or vote only for tax-cutters. Politicos, including Obama, owe it to voters to explain this instead of always avoiding it as too difficult. No, it isn't too difficult, it's essential! We have got to staunch this rabid tax cut, spending cut mentality or we're all for the high jump. (Or more likely, third world nationhood!)

We want and expect this to happen.

The Repukes must be made to "eat their peas" as well as their spending cut desserts!

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