The third article in the Economist’s election report is on Taxes, Spending and the Deficit. The latter of these is particularly interesting to me. Most people do not dispute the adage that you should not spend more than you take in. On the other hand, most people cannot print money, and enjoy the benefit of being the pre-eminent store of value in the world. Euros anyone? Rupees? Yuan? Shiny metal?
MattYglesias sees this as a key issue in the campaign, and wants the candidates to explain beyond the tautology of “debt is bad” why reducing the deficit makes economic sense right now:
Here's one question I'm all but certain won't be asked tonight but really should: Given that both tickets are running on rival deficit reduction plans, could you explain to the American people what problem in the typical person's life today would be ameliorated by a smaller deficit?I think the right answer is: Nothing. Not because the deficit never matters. There are some times in American history when one could credibly say that deficit reduction would make it cheaper and easier for a person to get a mortgage (or refinance an existing one) or a small business loan. There might be a time when you could say that deficit reduction would strengthen the value of the dollar and raise the average person's real purchasing power. But today? I think nothing. And yet politicians who are eager to shoehorn their long-term economic policy preferences into a deficit reduction frame are almost never asked to explain why deficit reduction is important.
Add to this the fact noted previously that presidents have little control over the economic cycle, beyond short term influence, and this seems even more relevant. Plus the numbers can only work if Medicare, Medicaid and Social Security are tamed in a world where people are living longer and demanding more and increasingly expensive medical care.
Health care deserves its own post, and I’ll try to get to that next week. On Social Security, Governor Romney has advocated raising the retirement age, which to me, is the simplest and best solution to the problem, getting the program back in line with life expectancy and the ability to work in today’s Knowledge and Service Economy. Then again, he has also promised no change to social security, so it’s hard to know where he stands. The President has proposed no change.
Taxes are where the difference between the candidates are most marked, and I suppose that is why they are so often discussed. The President has proposed extending the Bush tax cuts for all except the wealthy: the top two brackets, now 33% and 35%, would revert to the 2001 rates of 36% and 39.6%. Governor Romney would cut all rates by 20%, although he says the action would be “revenue neutral,” offset by cuts he has declined to identify.
I don’t really like either of the candidates’ positions on this topic. No-one has convinced me that we shouldn’t be spending more freely on infrastructure while the currency is strong and interest rates are historically low; no-one has advocated reforming the ridiculous tax code beyond meaningless proposals to “close loopholes.” I side with the president on the tax rate issue, but with the governor on social security, although it requires a leap of faith as to his true intent. And I return, as always, to the point yesterday that change of any kind is unlikely to be approved in Congress.
Talking Loud and Saying Nothing: