Purity
Western economies are in trouble. Europe’s crisis is well known. Excessive borrowing by countries on the fringe of the European Union have put their financial system on the verge of collapse. In the United States, borrowing to finance two wars and prevent a major financial fiasco over the last 10 years, have left the United States with a fiscal time bomb in its future. Both crises have at their core ideological rigidity that has overridden common sense and intellectual analysis.
Standard practice for economic policy makers to deal with a balance-of-payments crisis and financial problems is to devalue the currency. By devaluing, a country’s exports become competitive, allowing balance of payments to return to balance or a slight surplus, then debts to foreigners could be repaid. In recent years, the International Monetary Fund has provided bridge financing while demanding tight fiscal policies in the countries receiving aid. External bond holders often extended maturities as confidence in the ability to pay rose. In the late 1990′s the Asian financial crisis was dealt with in this manner.
The current crisis in Western Europe would fit this model were it not for the existence of a common currency: the Euro.
The ideology behind the creation of a common currency for Europe and for European Union is rooted in the tragic history of the 20th century. At the end of World War II, Germany was divided with a powerful Soviet Union facing the West in Europe. One of the solutions to keeping Germany in the Western orbit but denying them the ability to threaten its neighbors in the future was to create a customs union, i.e. a trading bloc with no internal tariffs, which was advocated by leaders such as Paul Henri Spaak of Belgium and Jean Monet of France. In 1951 the first of these, the European Coal and Steel Community was created. This success was followed in 1957 with the creation of the European Economic Community expanding ECSC to all goods. At the time, Euratom, a common program for the development of nuclear energy was also included. The original six countries were: Belgium, The Netherlands, Luxembourg, France, Italy, and Germany. England joined in 1971. Following the reunification of Germany and the end of the Cold War the EEC expanded to include 27 countries representing most of Europe.
The Eurocrats in Brussels, and Europhiles in many governments on The Continent , saw this expansion as an opportunity to further the dream of Europa Unis by establishing a common currency.
Many economists, beginning with Robert Mundell in the 1960′s, examined the complexities of establishing a common currency area. Most advocated the establishment of a central bank as well as significant fiscal oversight. All acknowledged that the fundamental problem was achieving fiscal balance in a diverse group of sovereign entities. In 1973 the international finance section of the Economics Department at Princeton University, in a pamphlet titled, “The Case for European Monetary Integration, ” sounded a prescient note of caution when the author, James C. Ingram, wrote, “Public investments made possible by bond issuance in Community capital markets, should be used to increase the productive capacity of the region and not to just maintain consumption levels. To finance unemployment compensation or other income maintenance programs by external borrowing would be asking for trouble!”
The Maastricht Treaty that collapsed the three European Communities into the European Union set up a process and some rules for the common currency. Monetary and fiscal issues were addressed.
The European Central Bank was established. Unlike the Federal Reserve in the United States,which has a dual mandate to control inflation and maximize growth, the ECB has only to control inflation. This was done to assuage the sensibilities of Germans remembering their hyper-inflation of the 1920′s that led to disastrous consequences for the rest of the world.
Title Six of Chapter One of the Maastricht Treaty deals with fiscal policy in the vaguest of terms. Article 103 states that members shall “regard their economic policies as a matter of common concern.” The Eurocrats in Brussels are allowed to review and comment on member states’ fiscal policies but there is no mechanism for dealing with internal imbalances, and no sanctions for rogue policy-makers. As a lecturer once told me in Amsterdam in 1971, “The problem with the European ideal is that there is a Court but there is no Sheriff.” Buttressed by the European ideal, it was just assumed that all would do the right thing. A collapsing Euro has proved this to be wrong.
In the United States, a similar ideological rigidity is on the verge of causing financial chaos. Republican “young guns” Paul Ryan and Henrico’s own Eric Cantor have sworn fealty to Grover Norquist and his no-tax-for-any-reason pledge. Ryan has proposed a budget that lowers tax rates, increases spending on Defense, and relies on unspecified cuts to balance the budget. No serious observer of politics, economics, or third grade math believes that this will work.
“Plupublican” Presidential Candidate Mitt Romney has adopted this rubbish. It seems as if the Republicans in Congress consider their oath to Grover Norquist to take precedence over their oath to preserve and defend the Constitution.
President Obama appointed Erskine Bowles and Alan Simpson to come up with a sensible plan to close America’s fiscal chasm. It requires tax increases as well as benefit cuts. So be it.
During the recent Republican Presidential primary season all of the candidates stated that they would not vote for a plan that was 90% cuts in spending and 10% in tax increases. If we do have a meltdown, we know where the blame lies.
Hah! Hah! Les, you’ve got the Europeans’ problem pegged pretty well, but the U.S.? It’s all the Republicans’ fault for not wanting to raise tax rates? Really? Never mind the massive the pork barrel spending, forget the entitlement crisis. Shove down the memory hole the fact that the Rs are willing to raise revenue by eliminating tax loopholes. You’ll feel comfortable laying the financial meltdown entirely at the feet of the Rs?
Please tell us what tax rates you’d increase, how much revenue you’d expect to raise, and what percentage of the budget gap you’d close.
Jim’s point on loopholes is a good one. Examine the following graph:
http://visualizingeconomics.com/2012/01/12/the-great-divergence-2/slate_incomeslides-09/
The steady decline in the effective tax rate paid by America’s 1% began long before the Bush tax cuts (actually two cuts – one in 2001 and another in 2003).
set tax rates at the same level as we had under Reagan or Clinton….
what’s the argument against that?
DOD spending has DOUBLED from 2000 to 2010.. at the same time we cut taxes, financed two wars off budget and added Medicare Part D.
Why do we talk about the entitlement “crisis” without even talking about numbers especially the increase from 2000 to 2010 ?
You cannot DOUBLE the DOD budget …and not end up with a “spending” problem.
Pointing the finger at entitlements without giving real numbers defines the Republicans these days.
Listen to them on the across-the-board sequester budget. Talking about pork … the Republicans sound like a bunch of squealing pigs from Deliverance these days .when someone says “cut across the board” and put the taxes where they were under Reagan/Clinton.
The GOP has no answers. Their sole strategy is to run one wedge issue after another in hopes they can gain back control of the country….which the last time they accomplished that – they pretty much destroyed the budget…then blamed it on others.
what have I missed here? There is nothing worse than a Fiscal Conservative Hypocrite; they’re even worse than Greeks….
LarryG:
Your point seems like it should be right but actually is wrong. In the following graph you can see that revenues were well on the way to exceeding outlays from 2003 through 2007. However, the Great Recession turned that around in a hurry.
Guess Arthur Laffler is rolling in his grave. What?!? He isn’t?!? Oh, sorry Professor Laffler.
http://en.wikipedia.org/wiki/File:CBO_-_Revenues_and_Outlays_as_percent_GDP.png
” Most Republicans and conservatives despise the British economist John Maynard Keynes and believe his theories are the root of all evil in economic policy. Yet when push comes to shove, Republicans are happy to fall back on Keynesian theories when it suits them.”
http://economix.blogs.nytimes.com/2012/05/29/republican-keynesians/
The first change I would make in the tax code would be to end “carried interest”.This bit of accounting allows hedge funds to pay taxes on income at the low rate of 15% for capital gains rather than tax as ordinary income. Next I would restore the Clinton rates on ordinary income. Means testing for medicare should be on the table as should an increase in the social security base tied to an increase in the retirement age.
Should I assume you would not restore the Clinton rates on capital gains? If so, would you consider reducing Virginia’s tax rate for capital gains from investments located in Virginia (assuming that could somehow be ascertained)?
Medicare and SS are already means-tested but both have to ratchet it up.
SS is funded from FICA and has no real role in the budget deficit despite the fact that most graphs show it as an expenditure (but they also show FICA as a funding source) – SS/Medicare Part A are known as “earmarked” entitlements because they have dedicated funding that can only be spent on those entitlements.
Medicare Part B,C,D and MedicAid and others are known as “appropriated” entitlements because they are funded from general revenues (and user fees).
Medicare Part B,C,D (not Part A) are all totally voluntary and no one pays a penny into them via payroll taxes.
Those programs will have to cost more – especially for people who own two homes/3 cars/significant assets, etc…. right now many pay the bargain basement rate of $100 a month for 80/20 insurance. The actual cost of Medicare would be more than $400 a month if it were required to be self-funded.
Everyone thinks that seniors “EARNED” Medicare. They did not. Perhaps they should. That’s how every other industrialized country does it (via payroll taxes).
I’d get rid of the mortgage tax deduction for second homes and I’d cap it at the median home price so if you want a bigger, more expensive house, go for it, but no taxpayer subsidy.
I’d take a closer look at the other entitlements including MedicAid especially at end of life when many go into care facilities and try to get Uncle Sam to pay by giving their assets to their kids.
But DOD and National Security eat up every penny of income tax (personal and corporate) – to the tune of about 1.3 trillion. Our Armed Forces are bigger than the next 10 countries – COMBINED.
http://en.wikipedia.org/wiki/Military_budget_of_the_United_States
About another trillion on entitlements – 300 billion, Medicare (B,C,D), 300 billion MedicAid, then another 400 billion on sundry programs like SNAP and unemployment, SCHIPs, etc.
The GOP wants to cut entitlements but not DOD and not increase taxes.
there is no way to balance the budget that way. It’s impossible.
but they still want to cut entitlements, keep the tax cuts and call it done.
re: the chart of outlays vs revenues
here’s the chart that tells the true story:
http://en.wikipedia.org/wiki/File:CBO_Forecast_Changes_for_2009-2012.png
cutting taxes while not cutting spending – makes you vulnerable to economic downturns and leaves you deep in debt at the same time your economy is trying to recover.
There is no “Plan B” for the tax cuts if they do not work – they just leave you with a stubborn structural deficit and decades of debt that you cannot clear.
And this is the work output of those who claim to be Fiscal Conservatives.
You call Richmond the Clown Show. I call the GOP a clown show for convincing others of their fiscal conservative credentials but feckless performances.
Even now, they refuse to acknowledge the fiscal realities in trying to bring the budget to balance. They fervently believe (or say they do) that if you cut entitlements, preserve DOD funding and keep the tax cuts that we can balance the budget.
you cannot. The numbers do not work.
“Even now, they refuse to acknowledge the fiscal realities in trying to bring the budget to balance. They fervently believe (or say they do) that if you cut entitlements, preserve DOD funding and keep the tax cuts that we can balance the budget.
you cannot. The numbers do not work.”.
How can you possibly make that assertion from the graph you supplied? The impact of the tax cuts is conflated with Medicare Part D and the cost of the wars. The war in Iraq is documented but not the war in Afghanistan. And, the total of the down arrows is a comparison against an $850B surplus, not balancing the budget.
You have, once again, been seduced, hoodwinked and hypnotized by the libtard main stream media.
On the positive side, I agree that the national Republicans haven’t done anything to control the deficit. And your supplied graph kind of demonstrates that (although it conflates recession based changes with changes resulting from overt government actions).
What your graph doesn’t do is demonstrate your assertion that, ” The numbers do not work.” when it comes to the Republican plan.
I can balance the budget rather quickly. Let’s cancel Social Security and disburse the trust fund by making payments to each and every person. That reduces the tax on the vast majority of Americans by 6.2% or so. It reduces the tax on employers. And … disbursing the trust fund would put about $8,400 into the hands of every American man, woman and child.
What? There is no trust fund? It’s just IOUs from the federal government? The government spent the extra money it collected and replaced it with paper notes from itself to itself?
Oh Dear.
http://www.washingtonpost.com/wp-dyn/content/article/2011/03/10/AR2011031005932.html
The Karl Rover PAC is running an Ad that says that under Obama, the debt has increased by over 5 trillion dollars.
The facts are true.
But they tell a totally false story.
Obama did not create the budgets that have a 1.5 trillion annual deficit.
Congress created those budgets.
Obama cannot cut the budget – only Congress can.
Obama has agreed to the sequestration budget that would cut across the board and what has the GOP done? They’re wailing like stuck pigs.
This is the state of the Grover Norquist “no mo taxes” GOP.
they double the DOD budget, and as a direct result, drive the country into 12 trillion of debt as a result, Blame Obama for what they did – and now refuse to actually deal with consequences.
And if that were not enough.. they PROMISE that if we put them back in charge, that they will FIX the problem…by cutting taxes further and cutting entitlements.
the graph shows HOW we got the deficit.
re: Krauthammer
DJ – did you know that there are about 200 “Trust Funds” in the govt and they all work exactly the SAME WAY? You need to seriously get educated before you spout off.
start here: http://www.gao.gov/new.items/d01199sp.pdf
be sure to read page 9:
where do you think your Federal Gas tax goes?
how about premiums for Medicare Part B?
airport fees? Military pensions and health care?
read the FAQ guy
in terms of the budget and the constituent parts:
http://en.wikipedia.org/wiki/File:U.S._Federal_Spending_-_FY_2011.png
and remember… the 725 billion for SS is funded from FICA – not general revenues. The rest of the pie chart is funded from general revenues.
here’s some basic numbers:
Revenues:
Income – $1.165 trillion.
Social Security and Medicare payroll taxes – $775 billion.
Corporate – $237 billion.
All other – $292 billion.
total = $2.469 trillion
The largest mandatory spending programs were Social Security and Medicare, as follows:
Social Security – $820 billion (funded from FICA)
Medicare – $523 billion (Medicare Part A 210 billion funded from FICA)
Medicaid – $283 billion
TARP – $12 billion
All other mandatory programs – $654 billion. These programs include Food Stamps, Unemployment Compensation, Child Nutrition and Tax Credits, Supplemental Security for the Disabled and Student Loans
http://useconomy.about.com/od/usfederalbudget/p/US-Government-Federal-Budget-FY2012-Summary.htm
http://useconomy.about.com/od/fiscalpolicy/p/Mandatory.htm
http://useconomy.about.com/library/fy2013budget.pdf