Barron's Letter to the Editor re Roundtable Comments on Debt, Taxes,
and President Obama
January 22, 2013
Mailbag
To the Editor: editors@barrons.com
In Barron's Roundtable (Jan. 21), your panelists illustrated that very bright people are as susceptible to group think as anyone. Although they disagreed about much, they mostly agreed that:
1.) economic growth is impeded by high government
debt;
2.) debt is high because of high government
spending (not low government revenues);
3.) social security is an "entitlement",
contributes to government debt, and must be "reformed" (benefits cut);
4.) President Obama is
"playing chicken" or not leading by failing to agree to Republican
demands linked to authorizing a debt ceiling increase;
5.) any tax increase represents a
"fiscal drag";
6.) Bernanke is irresponsible by using
maximum monetary stimulus (absence of fiscal stimulus is ignored).
If all of these assumptions sound
familiar, it is because they are essentially Republican talking points from the
2012 election. That the panelists are
passing them on as economic wisdom is disheartening. As it turns out, each
of these assumptions is deeply flawed.
1.)
As some panelists pointed out,
there is no evidence that economic growth - certainly not in the time frame the
panelists are interested in - is linked to government debt. The
Great Recession we are clawing our way out of was not caused by but caused the
Great Debt that the panelists bemoan.
The near collapse of the world's economy in 2008 was not caused by
spendthrift government bureaucrats but by people working in the same industry
as your panelists. Of course, we must
balance our books eventually, but doing so in the midst of an early economic
recovery is foolish, possibly disastrous.
2.) The most recent surge in government debt was
not caused by runaway
government spending (which since 2009 has been tame by
historical standards) but by a massive, record shortfall in revenue
(taxes). Federal income taxes as a percentage of GDP recently dropped to 13%, a
level not seen since perhaps the days of Calvin Coolidge.
It's really not that
complicated: drop revenues from 20% to
13%, throw in a financial crisis and 2 wars, and debt surges. One
war ended, the other will soon. The tax
cuts - which neither paid for themselves or stimulated the economy that much - are
being rolled back. The world will not
end if the panelists have to pay 3% more in top marginal income tax rates, or
even higher Reagan-era rates.
3.)
Social security is self-funded. As Ronald
Reagan put it best in 1984:
Social Security, let’s lay it to
rest once in for all…Social Security has
nothing to do with the deficit. Social Security is totally funded by the
payroll tax levied on employer and employee. If you reduce the outgo of Social
Security, that money would not go into the general fund to reduce the deficit.
It would go into the Social Security trust fund. So Social Security has nothing to do with balancing the budget or erasing
or lowering the deficit. [emphasis added]
Amen. One of your
panelists said that Social Security would run into difficulties in 2033 (when
it starts to pay out more than it takes in).
That is not my definition of a crisis but a remote accounting problem
easily fixed by tweaking contribution limits.
It is not a problem we need to address now during a weak economic
recovery.
4.)
President Obama is not "playing
chicken" by not agreeing to every demand by House Republicans. In fact, yielding to them would be
appeasement, and even recent history indicates appeasement
does not work. This is a faux crisis
the Republicans have created, holding the good faith and credit of the United
States government hostage (again) to what is supposed to be a formality, one
never seriously questioned or challenged during the Bush
administration's 19 debt ceiling increases totaling almost $4 trillion.
Thankfully, most Americans (who do not work on Wall Street so are not exposed
to the same group think), disagree strongly with your panelists, with 67%
believing that Republican leadership is giving too little ground in
negotiations and only 24% approve of House Republicans (versus 55% approval
of President Obama with 61%
seeing him as a strong leader).
5.) Equating "fiscal
drag" with higher taxes (to be fair, an assumption made by your editor) assumes
that the Bush tax cuts continued by President Obama until recently were both
a.) the correct level of taxation relative to the size of our economy and government
(the deficit and debt would argue otherwise) as well as b.) a massive
"fiscal stimulus." The
economy enjoyed far higher growth rates under top marginal rates as high as 90%
for decades; have economic dynamics or human behavior changed so much that
today no one will work if they have to pay 3 or 4% more out of their top
marginal dollars in federal income taxes?
Either deficits matter - in which case it should be all hands on deck
with everyone chipping in through higher taxes - or they don't.
Yes, printing money - if continued
indefinitely - is irresponsible. But so
is not paying your fair share of taxes when empirically it is clear that
revenue collected is far less than what is needed to run the country, then
insisting that the elderly and disabled work longer or eat less so that tax
cuts for your panelists and their friends are continued.
6.)
The panelists seemed to imply that the government is powerless to do anything
to stimulate the economy (except continue to lower taxes for the wealthiest Americans). While
bemoaning the debt of the government, they failed to recognize that were it not for massive deficit spending by
President Bush through the Troubled
Asset Relief Program, the financial sector would have likely imploded and most
of your panelists would be out of work.
Equally ungratefully, they praised manufacturing's recovery - including
in the auto industry - without noting that were
it not for President Obama's auto bailout, there would be no American auto industry
so no significant manufacturing sector to improve. Had
that fiscal stimulus money not been spent, it is likely (although certainly not
guaranteed) that the federal debt would be lower, but the Roundtable would be a
quieter and humbler affair with most panelists unemployed and a much smaller
economy to analyze.
In the absence of any fiscal
stimulus since 2009, mostly because Republicans have convinced each other (and
apparently most panelists) that government can neither stimulate the economy nor
create jobs, the only remedy is monetary policy. As Fed
Chair Bernanke has pointed out repeatedly, he would be far less compelled
to engage in quantitative easing if Congress would do something - anything - on
the fiscal front. Were Bernanke to continue printing money
indefinitely, I would be nervous, but it is clear this is an extraordinary,
non-recurring situation. The time to
worry about your water bill is not when your house is on fire.
There are many forms of
profligacy. One is printing money. The other is not paying the dues necessary to
run a civil society; the panelists, many of whom receive their income as
deferred capital gains so likely pay a Romneyesque
15% marginal tax rate, were astonishing in their ability to ignore the 500-pound
revenue gorilla in the room.
To be fair, some panelists did let
slip that they did not fully or unanimously endorse all of these GOP talking
points. Bill Gross, for example, noted
that the surge in corporate profitability has largely come at the expense of
workers, whose wages by any measure have shrunk. Those workers are also consumers and
consumption makes up 70% of the economy.
The resultant contraction in spending is bad for business. This decision by management to pay themselves
and shareholders proportionally more than the workers who helped create the
profits in the first place occurred despite historically low personal income
tax rates or high government debt. It is unclear how lowering taxes or reducing government
debt would fix this problem.
I enjoy
reading the Roundtable each year but find these political talking points injected
into a discussion about where readers should invest their money both distracting
and annoying. I own no Democratic or
Republican dollars; they simply ask to
be invested in the best opportunities on the planet regardless of geography or
political biases. I look to Barron's for
clear-eyed analysis that I can trust, and hope the moderator of the Roundtable
discussion can do a better job about challenging assumptions that are not
supported by empirical evidence.
MV
