Barron's Letter to the Editor re Roundtable Comments on Debt, Taxes, and President Obama 

Don't know if they will run this, but they have run past letters I've submitted.  I used to enjoy Barron's quite a bit, and still do, but find the commentary has lurched to the right since President Obama took office (although to be fair, many were critical of President Bush's spending when he was in office; they just never went as far as to even entertain the idea of using the debt ceiling as a tool to rein it in, and notably they supported both wars and all the tax cuts, as well as the financial deregulation that created the debt they now bemoan.)

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