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Thoughts from the Frontline

The Direction of the Compromise

September 15, 2012

Choose your language

"How did you go bankrupt?"
"Two ways. Gradually, then suddenly."
– Ernest Hemingway, The Sun Also Rises

We are often told that the current election is the most important in recent history. I think I have heard that in about ten presidential cycles, ever since I first voted, for McGovern, as a young man. And looking back, only about one of those elections actually qualified on that score. I think this election does have the potential to be one of those rare times, at least in terms of economic outcomes. In Thoughts from the Frontline we cover economics and investments, money and finance. We only rarely stray into the political world, and then only glancingly. Today, we cross that gray line, but at a somewhat different angle, as we look at the economic consequences of the political decision that will come with the choices we make in November in the US.

But it is not as simple as suggesting that choosing one party over the other will solve the nation's economic ills. If that were the case, we would not be facing the momentous challenge we now do, because both parties have had firm control of the levers of power in recent years, and both have failed to deal with what has become, at least for this economic analyst, the burning issue of the day. Indeed, both have made it worse. Today we look at what the choices are and the impacts of those choices.

The Economic Consequences of a Political Decision

The preview of economic consequences depends on your view of what the most important issues are that need to be decided (in terms of economics). Let me list my top ten.

1.  The Deficit

2.  The Deficit

3.  The Deficit

4.  The Deficit

5.  The Deficit

6-10. Everything Else

I am only being mildly flippant.…

Discuss This

27 comments

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Comments

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Gordon Davis Jr

Sep. 16, 2012, 11:32 p.m.

It seems to me that the die was cast some time ago.  Raising taxes on the middle class or substantive cuts in government spending are both politically untenable and are not going to happen, regardless of the political rhetoric.  The Fed will continue to expand its balance sheet via bond buying and Congress will continue with growing deficits and the resulting debt.  It is unclear to me how long this can continue until the markets rebel.  The politicians seem to be betting on a long run.

David Fischer 37051

Sep. 16, 2012, 5:06 p.m.

I have to ask the same question Abraham Lincoln asked – Instead of borrowing and deficit spending, why can’t we just print the money we need? The government is not the same as an average citizen. It can create money, especially since we are not on the gold standard. I understand that printing too much money is inflationary, but that is exactly what the FED is doing now and exactly what banks do when they lend (thank you fractional reserve banking. Why isn’t it better for the government to print rather than borrow? This would eliminate interest and stop making the banks fat at the expense of the taxpayers.

Allen Johnson 30127119

Sep. 16, 2012, 4:06 p.m.

Re: Mauldin - The Direction of the Compromise 9/15/12
Two points:
First:
I think your statement “One path will mean a larger government and budget…” is more a not-so-subtle political jab than a true reflection of your analysis earlier in the article.  A more accurate analytical statement, in my opinion, was your prior sentence in bold:  “We are voting about the direction of the compromise. Pure and simple “.
I would argue that the incumbent has demonstrated much more willingness to arrive at the needed compromise than the opposition.  
Additionally, the incumbent’s preference for reducing and re-directing military spending into domestic and demographically dictated needs appears to me to be a much more rational direction to take than the opposition’s stated desire to increase military spending even further.

Second:
I don’t believe The Romers’ paper differentiates between the effects of broad based and narrowly focused tax increases.  Their conclusions are, no doubt, valid for broad based tax increases generally.  On the other hand, a modest,  narrowly focused increase on you and I and others in the highest income bracket, who have a higher propensity to save on the margin than consume, is unlikely to reduce economic growth much, if at all.  That, I believe, is the well-considered basis for the incumbent’s approach.

To me, the incumbent demonstrates a superior approach to both willingness to compromise, and nature of compromise to be pursued.
I enjoy your newsletter.  Thank you.

Al Johnson

Craig Cheatum

Sep. 16, 2012, 3:33 p.m.

We are “severely” coservative around my house but would never consider voting Republican for president because almost all of the national debt has been run up by Reagan (tripled the debt) and Bush Junior (doubled the debt and soon to be tripled although his commitments after 8 years are being credited to Obama). 

I do like your tax proposals a lot, especially the VAT, mainly because I believe we need to move away from a 70% consumption economy and the VAT may cause citizens to think twice and save instead of buy.

I believe it is possible to solve the Social Security and Medicare problems over time.  One positive move woulf be to deposit $20k ($10k for retirement and $10k for aged health) for each newborn.  The money could be invested in a broad assortment of stocks and bonds.  Likewise, the monthly revenues should have at least 50% directed to the investment funds (under some of Mauldins proposals, an equivalent amount might need to be set aside from general revenues).  Over time the investments could become self-sustaining and the portion alloted to investments would not be available for politicians to spend.  I suspect health care costs are in a bubble (costs have gone up 150% and more in developed countries since 1992 but only 35% in Japan) and will either self-adjust/self-destroy or will have limits imposed on them by the government.

Craig Cheatum

George Roberts

Sep. 16, 2012, 1:19 p.m.

James Auster brings up a similar point to mine.  My understanding is that the fed already bought a trillion (with a T) dollars worth of us government bonds/bills/treasuries.  When the “bang!” moment comes I’m not sure anyone will notice as the Fed will just buy them up until the interest rate is down to whatever they deem “correct”.  What am I missing here?  Now it seems that economic theory would predict inflation at this point which is how most governments get out of debt. So what would happen if the Fed owned 99% or more of the debt?  Please walk me through an example of what might happen.

Mike Kelly

Sep. 16, 2012, 12:29 p.m.

Pundits keep talking about the inevitable rise in interest rates in this country. Why? Look at Japan for the last 30 years. Our politicians are looking at Japan and will conclude that our problem is years away, and they will do NOTHING.

Henry Hieslmair

Sep. 16, 2012, 9:30 a.m.

Scanning through the Romer paper, there is no distinction made (as far as I see) on taxing middle class vs the top 1%. All taxes through the history examined are lumped into ‘taxes’. The distinction of who is taxed is of huge importance. The middle class seems to me to be the engine of demand and of the economy. The wealthy do not impact the overall economy. As the middle class buys Apple iPhones and iPads (Apple discovered an unmet want), the economy grows as older phones and devices become artificially obsolete next to pretty new dives. Additional taxes on those middle class consumers can hurt the economy because those people would hold onto old cell phones longer. Additional taxes on Tim Cook, however, would have no impact on the economy. With current low interest rates, and so many dollars looking for yield, the supply side doesn’t matter any more. Capital for new and good business can be easily obtained. It is the demand side that is foundering. The rich are simply not a significant part of the demand side.

Roger DeReu

Sep. 16, 2012, 8:14 a.m.

I simply cannot get behind a VAT of any kind, even if it might be the right thing to do.

1. They will NOT remove or decrease any other taxes, just add this one
2. It will start out low, like the income tax did, and just keep going up
3. If they do lower another tax to compensate, it will be no time before they ratchet it up right back to where it was.
4. Most of these politicians have never seen a tax they didn’t like.

Perhaps I could support a VAT if every politician who voted for it were permanently banned from public office ever again; under penalty of death if they even thought about it. That would be a “start” in cleaning “House” (and Senate).

gary legon 40861

Sep. 16, 2012, 7:10 a.m.

The mythic Ronald Reagan, GH Bush and Bill Clinton, all raised taxes.  Why did the economy grow not shrink?  One of the supposed experts must have a reason for this. 
I have agreed with your basic premise for some time that slowly bringing the deficit down would be wisest and it would avoid steep declines in GDP and overall economic stability.
I disagree with your scenario that the two choices we have is smaller government or less smaller government. T think the choice is between sanity and something more dangerous. 
I feel betrayed by the Republican Party, which has given us a candidate who seems to have no position or every position on all the issues we face.  Not only the deficit but our relationship to a fractured world.  We have neocon advisors to Romney who seemingly are itching for confrontation and and social right wing extremists worried more about gay marriage and abortion then issues of war and peace and economic success or failure.  I have become a Ron Paul Democrat (a rare breed perhaps) but I no longer feel comfortable in a Party that prefers the Bible to science and common sense.  By all means believe as you wish but making it the position of the State and trying to make it the laws of the land is a bridge too far for me and my vote.

Harry Evans II

Sep. 16, 2012, 6:25 a.m.

Great analysis of things to come.  Your comment about the bond market freezing up is of interest.  Any idea how much advance notice of, or indications of, when that might happen?

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