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October 23, 2010



I definitely agree that it's spending that matters more than taxation*. I suspect lowering taxes (on its own) right now probably wouldn't do much of anything because the wealth effect seems shot for the time being. Economic actors are just too leery of overleveraging, even from governments. Also, the naughts were a decade of unusually low job mobility even before the housing market collapse, so I think frictional and structural employment were temporarily depressed. The construction bubble (for example) helped ensure that traditional jobs remained available and semiskilled workers remained able to support families on their own. We're paying for this now, with the simultaneous collapse of various long-ailing industries that were propped up by cheap oil, cheap money and increased defense spending.

In a sense it's good it's happening all at once because it has forced some frank engagement with realities like the impossibility of endless defined-benefit retirement, the outrageous rent-seeking of unionized labor, and so on. Witness the 80K signatures prop B backers in San Francisco had no trouble mustering to bypass the left-leaning city council and get it on the ballot. In some ways it exaggerates the problem because government expenditures spike because of unemployment payments and other means-tested benefits at the same time as tax revenues are cyclically depressed - something that always happens but is happening much more extremely than usual this time. The yawning gulf between income and expenditure is enough to really scare people and make them think about long-term insolvency. Unfortunately, I can't say 'think *seriously* about long-term insolvency' because almost everyone in office or running for it seems to agree that we can't cut any popular entitlements or defense and almost nobody seems to have cried foul. Well the Democrats have, but they're just fighting for higher taxes and the reason they want the GOP to name what they want to cut is because they intend to bludgeon them with it. This is a stupid situation, because fiscal realism should be a political advantage, not a liability. I wish some leading light would say "hey, we're going to have to raise the retirement age, we're going to have to cut back a bit on defense, we're going to have to tighten up medicare benefits, and we may also need to let taxes go up a bit for a little while too." Mitch Daniels said something a little like that, and then he was all but ejected from the party. I'm not aware of any Democrats saying anything like that.

Maybe there was no time when successful politicians actually treated the American people like adults on fiscal matters, but there;s a first time for everything, and now would be a good time.

*Not absolutely, of course. There are a variety of ways and scenarios in which taxation is very important, but I don't think they pertain to this discussion at this time. We could start talking about laffer curves and whatnot if we had the huge marginal rates we had in the mid-20th century, but there doesn't seem to be an obvious relationship between tax rates and economic growth in the current range.

Nathan Smith

I wouldn't say it's completely worthless that the Republicans are against big government spending in the abstract, even if they refuse to give specifics. It is irritating that some people treat the Tea Party like saviors of conservatism when it's Republican Establishment figures like Paul Ryan and Mitch Daniels who are the only ones proposing responsible plans for restoration of fiscal reason, which the Tea Party populists don't have the courage to endorse. Still, the Republicans won't have power to implement a specific program of spending cuts if they only take the House, and to get specific might just give the other side easy targets. At any rate it's clear that stimulus and Obamacare wouldn't have passed if the House of Representatives we're likely to see in 2011 had been in place in 2009-10.

I think politicians have been more adult about fiscal matters at virtually any point in American history between 1776 and 2008 than they have been recently. That should be a source of some hope, since a mere reversion to the mean would be a major improvement over the present. One election probably won't be enough to get us back on track but we might get to a better equilibrium over a couple of cycles. However, immigration reform is absolutely essential. Without immigration reform to reflate housing prices and defray the pro-coercion lobby, America is definitely past its prime in the world.

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