The Free Thinker

"What Our Declaration Really Said" (E.J. Dionne)

WASHINGTON -- Our nation confronts a challenge this Fourth of July that we face but rarely: We are at odds over the meaning of our history and why, to quote our Declaration of Independence, "governments are instituted."

Only divisions this deep can explain why we are taking risks with our country's future we're usually wise enough to avoid. Arguments over how much government should tax and spend are the very stuff of democracy's give-and-take. Now, the debate is shadowed by worries that if a willful faction does not get what it wants, it might bring the nation to default.

This is, well, crazy. It makes sense only if politicians believe -- or have convinced themselves -- that they are fighting over matters of principle so profound that any means to defeat their opponents is defensible.

We are closer to that point than we think, and our friends in the tea party have offered a helpful clue by naming their movement in honor of the 1773 revolt against tea taxes on that momentous night in Boston Harbor.

Whether they intend it or not, their name suggests they believe that the current elected government in Washington is as illegitimate as was a distant, unelected monarchy. It implies something fundamentally wrong with taxes themselves or, at the least, that current levels of taxation (the lowest in decades) are dangerously oppressive. And it hints that methods outside the normal political channels are justified in confronting such oppression.

We need to recognize the deep flaws in this vision of our present and our past.

A few points to make here. First, the main problem is not that taxes are too high but that deficits are so high as to be a profound threat to the very legitimacy of the United States government. There is never really all that good a reason why a new generation of Americans should accept the debts incurred by a previous generation, but when the debts aren't too large, the merely utilitarian logic of not defaulting so as to hold down one's costs of borrowing tends to prevail. But with deficits of 10% of GDP or so, we are forfeiting the legitimacy of asking our children to pay for the reckless spending of today's politicians. Such deficits amount to a rampant degradation of our institutions. Second, taxes are far higher than anything the founders imagined. Third, the federal government's powers today extend far beyond anything the founders would have believed they were sanctioning. To that extent the "Constitution in exile" school is right. In deriding the idea that "the current elected government in Washington is as illegitimate as was a distant, unelected monarchy," Dionne elides the distinction between whether the government is legitimate at all and whether there should be any limits on what it can legitimately do, implicitly rejecting the latter with an idea of democratic absolutism, i.e., since the government is elected, it can do whatever it wants. An important question is thus begged.

Subprime Uncle Sam

Megan McArdle on "The Risk of Debt":

So why should we worry about the ability of the government to borrow?  For the past decade, at least, the American government has been able to borrow pretty much all the money it wanted without seeming to pay much of a price in terms of higher interest rates.  Bush's deficits were worrying in a number of ways, but they certainly didn't crowd out private investments, and we got a good deal on the money.

Bush's deficits didn't crowd out private investments?  I'm not so sure.  Investment was down in 2001-2008 relative to the 1990s.  And what investment there was was concentrated in housing, a sector that (a) is politically favored, and (b) where the investors are ordinary people who might be less savvy to the changing future than businessmen are.  I'd bet that Bush's deficits did crowd out private spending.  Not that we'll ever exactly know.  McArdle continues:

But Obama's spending plans are extraordinarily ambitious.  His projected deficits for the rest of his possibly presidency are higher than the "runaway" deficits that plagued most of the Bush administration--and after the first few years, that's not stimulus, that's ordinary spending outstripping revenue.  For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is?  That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.

The answer from the right has been a nervous (perhaps hopeful) 2-3 years.  The answer from the left, and professional Democratic wonks, is some unspecified time in the future.  Probably, there will be a Republican in charge.  Markets hate Republicans.

But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible".  This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking".  Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs.  Bond markets don't.  That's why James Carville famously wanted to be reincarnated as the bond markets so he could "intimidate everyone".

In hindsight, it seesm obvious that subprime borrowers were taking out loans they couldn't afford and were headed for disaster.  What will Obama's spending plans look like in hindsight?