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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

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Comments

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William Wood 88840102

Sep. 15, 2012, 8:10 p.m.

We are seeing many rumblings of sections of countries looking to get away from central governments.  In fact, there are rumblings here.  The big question may be how many central governments will be able to survive.  In fact, a very pertinent question is how (whether) the USA will survive in one piece.

As is said, if something is in its name, it isn’t (like the “United” States).

Girish Vinod

Sep. 15, 2012, 7:25 p.m.

I dont understand why and how you advocate VAT. It is a repressive tax. It taxes people in inverse % proportion to their spendings. The RICH can always travel abroad and buy TAX FREE almost everything they spend on while poor cant go on foreign jaunts for their shopping.

I was also surprised to not hear anything on latest Bernanke action which along with Draghi action is a backdoor colonization of all developing countries and middle and poor class people in their own countries as well.

A. Dorrance

Sep. 15, 2012, 7:03 p.m.

I was under the impression that the article would clarify whom we should vote for president. Obama wants to raise taxes, so he’s out. Ryan (and by implication Romney) proposes smaller government, but he doesn’t specify any cuts, and by lowering taxes and reducing revenues, the Ryan plan would worsen the deficit. In that Mr. Mauldin favors the smaller government solution, I’d appreciate a defense of Romney/Ryan that could dispel my fear of a repeat of the Bush II years.

Don Leufven

Sep. 15, 2012, 6:43 p.m.

Europe has both VAT and income taxes.  How is that working for them?  Two taxes to increase instead of one.  Until spending is under control, tax increases always go to more political spending.  Any examples to the contrary?

james auster

Sep. 15, 2012, 6:26 p.m.

US Federal Reserve, and now after all the worry about the Euro, the European Central Bank have found a miraculous and original cure for too much debt: print money to buy all debt. Global markets and economies like this very much. So why think about debt reduction by lower spending and increased revenue? Forget old school obsolete economics - print money and interest rates go down, inflation is minimized, and GDP grows out of recession. Am I missing something here?

Mark Lesser

Sep. 15, 2012, 5:55 p.m.

I have often observed the contradictions in Mauldin Logic, and this article is a prime example.  Growth is the goal, not growth of quality of life but increased GDP. OK, John, let’s stick to that insidious premise.  Haven’t you often said that innovation is the key to growth?  Well here lies the contradiction: innovation is almost always initially funded by the government.  The internet, space programs, military research in materials and medicine, and countless other government initiatives have created not some, but ALL of the growth in this country.  Show me a “private” company that is truly innovative in any meaningful way and also truly private.  Government largesse intelligently offered or covertly acquired is the key to success of all the wealth building I know of. The phrase “small government” is too overused to ring true.  The choice in November is much more than between large and small.  It should be viewed more in terms of the effect on innovation than on fiscal policy.  Here the choice is clear: if you believe that military spending at the expense of civilian research and development is the best road to innovation, than you ought to stick to your voting choice.

Isao Narikawa

Sep. 15, 2012, 2:47 p.m.

Concerning the Romer paper result of 3:1, it seems that everyone that quotes these results treat this like a universal constant, much like the speed of light.

I scanned the Romer paper and I didn’t see the estimated output results (GDP impact) of each individual event that was cited in the study. What was significant in the data that I saw was the evidence of a 10 quarter response to a tax change.

Having an engineering background it seemed to me that the Romer’s were trying to measure the impulse (tax change) response of the U.S. economy (the black box). If this was the task at hand, then their 3:1 universal constant result is astonishing. This means the U.S. economic system is intrinsically unalterable, a black box yielding the same impulse response, and hasn’t changed over the years of the study. Not influenced by the change from a manufacturing to a service based economy, nor impacted by the proportions of public and private debt. This to me is the greater accomplishment of this study, astonishing indeed.

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