Streetwise
Lauren Rudd
Sunday, November 29,
2009
I Come To Bury Caesar
Yes, I am a fan the New York Times. Now before those of you
with a more conservative bent walk off in disgust let me also state that in this
instance, “I come to bury Caesar, not to praise him.”
A recent front page Times "debt bomb" article was far too
alarmist, dwelling on the fact that servicing the debt could reach $700 billion
by 2019, up from the current $202 billion this year. In just a decade the
interest burden of the national debt could be as high as it was in 1992!
From the fourth paragraph, “Even as Treasury officials are
racing to lock in today’s low rates by exchanging short-term borrowings for
long-term bonds, the government faces a payment shock similar to those that sent
legions of overstretched homeowners into default on their mortgages.”
Any number of economists, including Paul Krugman and Dean
Baker, were quick to point out that there is no evidence presented in the
article that a rise in interest rates will place the government in a situation
where it will be unable to pay its bills, despite implications to that effect,
and no one cited in the article makes such a claim. The article did not present
the views of any economist who could put the deficit/debt issue in proper
perspective.
The only people really worried about the deficit are the
likes of Pimco managing director Bill Gross, one of only four named sources in
the article. Not surprising given that a rising deficit and higher interest
rates are bad for his business.
David Brooks pointed out in his Times column that same day
that the financial sector is in much better shape today than it was eight months
ago. TARP money is being repaid, and the debate now is what to do with the
unused billions. It is also clear that a nationalization of the banks would have
been an unnecessary, expensive and dangerously disruptive mistake.
The stimulus package was a mix of tax cuts and spending,
rather than just tax cuts as Republicans advocated or just stimulus spending
favored by Democrats. The decision to release the funds over two years, even
longer for major construction projects makes sense considering the hesitancy of
companies to hire. Nonetheless, the stimulus portion was probably insufficient
for the task at hand.
Meanwhile, no one would argue that the original expectation
that unemployment would begin to recede after hitting a peak of 8.1 percent was
wrong. This column was explicit almost a year ago in projecting that 10 percent
was virtually assured. However, as Christina Romer, head of the Council of
Economic Advisers, has said, the attention to that too-rosy projection “prevents
people from focusing on the positive impact of the fiscal stimulus.” And that is
wrong.
Let’s take a page from Economics 101. A country has to decide
how it wants to allocate its resources between guns and butter. Eight years ago
the decision was to allocate substantial resources for wars on two fronts. That
cost has now exceeded a trillion dollars.
At the same time there was no increase in taxes to fund the
war effort. Neither was there a reduction in domestic expenditures. Instead we
cut taxes, costing the government $2.34 trillion and giving 61.6 percent of the
tax reduction to the wealthiest 20 percent of the population, those with incomes
in excess of $105,000 per year. Those making in excess of $545,000 received 23.5
percent of the tax cut.
The real estate house of cards, which was created primarily
by those receiving that 23.5 percent of the tax cut, toppled taking the economy
with it. Now when we need substantial government intervention to put our
domestic economy, specifically Main Street, back on track we are up against a
towering deficit.
Want an easy way to correct the problem? Reverse the tax cut and add in a war
tax surcharge. Then double the fiscal stimulus or perhaps triple it. Oh, if
Congress objects, remind them that they were elected to serve the people, all of
the people, not just the wealthiest.
