We now know the makeup of President Obama’s bipartisan deficit commission. There are 10 Ds and 8 Rs with 14 votes needed to approve a recommendation As I go down the membership list, I see a lot of folks who are likely believers in the new Washington Consensus — significant spending cuts won’t help so big tax hikes are necessary. Of course, study after study shows big tax hikes are a terrible way to bring deficits under control. They kill growth which makes balancing the budget even harder since revenues are deflated.
A new poll shows Americans hate Wall Street. Of course, bankers are never popular. But maybe never less so than right now. Yet polls also show Americans cynical about Big Anything — Big Money, Big Business, Big Government. As Sen. John McCain likes to say, the approval ratings of Congress are so low, its only supporters must be paid staffers and blood relatives.
Washington will have difficulty producing a stranger bit of public policy than raising investment taxes to pay for healthcare reform. Remember, the consensus critique of the U.S economy is that it’s been plagued by too much consumption and debt. O.K., fine. So the answer is penalizing savings and investment? Really? Pure Bizarro economics for that and a number of other reasons:
David Leonhardt of the NYT just noticed that tax rates are going up and wealth is being redistributed. This makes him happy. But right now American faces a wealth creation problem. And if that isn’t working, every other problem facing America looks a lot worse. He also assumes that wealthier Americans won’t change their behavior, reducing the government’s take. Again, here is WH CEA Chair Christina Romer’s take on higher taxes when she was a econ prof at Berkeley: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] that tax cuts have very large and persistent positive output effects.”
Wow (from the Boston Globe):
Iraq is now considered a safer bet than Argentina, Venezuela, Pakistan, and Dubai — and is nearly on par with the State of California, according to Bloomberg statistics on credit default swaps, which are considered a raw indicator of default risk.
Healthcare reformers in Washington are asking America’s creditors to take a leap of faith. The plan is supposed to cut future budget shortfalls. But it depends on politicians following through on cuts and taxes, a deficit commission imposing additional discipline, and untested reforms working as expected. Owners of U.S. government debt shouldn’t bank on it.