The President’s re-election (More Discussion VI)

In my last post "The President’s re-election (MoreDiscussion V)" I set forth a very provocative presentation from Louise Mayo, PhD, Professor of History Emeritus, from Pittsburgh, Pennsylvania. I urge you to re-read it so that you can more easily follow my rebuttal, which follows.

I wrote:

I am also delighted about your comments on gun ownership. People sometimes think they are making me feel good by saying they agree with me, but if that is all I give to my audience, to affirm their own views, I am accomplishing very little. If I succeed in supplying facts, whether in support of predilections or in opposition, then I feel my hard work is productive. As you know, I always preach facts first, then opinions. If facts don't support the opinions then it is time to re-examine the opinions.

By the same token, I appreciate the facts you are supplying on the debt before, and during World War II and today. If you can supply the figures for the years following the war that would also be helpful. I believe the deficits were rapidly reduced. I would also appreciate your clarifying whether your figures are, in fact, for the debt, which would apply to all accumulated debt since the founding of the Republic, or the deficit, which is a figure that applies to a given period, usually the fiscal year.

My suggestion about the defense budget was not entirely sarcastic. It was a way of smoking out Paul Krugman's contention that deficits are the be all and the end all, that will solve our problems. I think that is simplistic, as is his contention that we can inflate our way out of the economic malaise. I also pointed out that with his logic increasing taxes on the rich is bad because that too decreases the deficit.

I am a Keynesian. I believe that in times of economic slow down, pump priming is essential and you are right that increasing the defense budget, while not the most efficient way of stimulating the economy, in fact, would do that, even though it runs counter to liberal orthodoxy. 

But not all increases in the deficit are beneficial. (Which is what Krugman appears to be saying.) Increasing taxes on the rich decreases the deficit, but Krugman would hardly argue that therefore this is undesirable. So it should be clear that larger deficits by whatever means, is not desirable.

In fact, if we correlate deficits, with economic performance over the years, we find that contrary to popular beliefs, most deficits were run up under Republican Administrations, (See table displayed in my blog "The President’s Re-election (More Discussion III)" while as Bill Clinton pointed out in his convention speech, "since 1961, for 52 years now, the Republicans have held the White House 28 years, the Democrats, 24. In those 52 years, our private economy has produced 66 million private sector jobs...So what’s the job score? Republicans, 24 million; Democrats, 42 (million)."

So clearly there is no correlation between deficits and private sector jobs. Pump priming is putting money in the hands of people who will spend it, thereby increasing demand, which will be met by the need to produce more, causing producers to increase production to meet the demand, which necessitates hiring, which creates more consumer demand, a circular cycle, which works well until demand outstrips supply, which causes inflation, at which point either demand must be restricted or means must be found to increase supply. Deficits are irrelevant in this, except in so far as sufficient revenue cannot be found to meet the need for expenditures, and then on a temporary basis, deficit spending can be justified. 

What made WWII successful in ending the depression was not deficit spending, but the creation of untold jobs in the defense industries and the huge expansion in our industrial capacity. Long range the GI bill, which increased educational opportunity, also laid the groundwork for economic revival for the future, and the wise investment in the Marshall Plan gave us markets for our goods. The deficits were a necessary evil in that endeavor, not the foundation.

The only time deficit spending is desirable is for investments that can be shown to produce a greater return than the cost of the investment in the long run. This is particularly true in the case of infrastructure spending, and investments in education. Private industry could never function without borrowing, but such borrowing is never for salaries, it is for investment in plant, which is depreciable.

                       

At the end of your presentation you make the standard argument, "Borrowing rates will never be as low again as they are now" first advanced by one my subscribers, Robert Malchman, and later advocated by Krugman. But that is a great fallacy recognized by our President. The credit we have is not at a fixed interest rate. No one can predict when it will go up, or how fast. It will at some point. No one know when or how much. When it does, we can't just pay it off all at once. We suddenly have huge expenses in debt service.

                       

I have said this time and time again. 

That is why an increase in revenue is so important. We need to spend on creating jobs, and at least as important if not more so, we need to spend on infra-structure, enlarging our ports, repairing our highways and bridges, our electric grid, our access to the web, and above all in our educational system. 

We achieved greatness because we were one of the first countries in the world that made high school free. We now must make college free. Not all colleges. Private colleges should remain private. But State and Municipal colleges must be free. The federal government must make grants to enable this. The huge debts incurred by people striving to make it into the middle class and instead being destroyed by it must stop. Those that have already incurred these horrendous debts must be allowed to declare bankruptcy and get a new start.

It is unfortunate that the Left is fixated on entitlements. They are important, but they are not the be all and the end all. To demand no changes is absurd. Social Security is an easy fix. Yes, a large part of it can be fixed by lifting the cap on the payroll cap. But if this is not politically feasible, then we must be willing to do that which is. Lifting the retirement age has drawbacks, but if that is the only politically viable way to extend the life of the program we need to do it. To do nothing is to doom the program. I prefer that to changing the COLA. Political reality cannot be ignored.

As for Medicare and Medicaid, Increasing the eligibility age will not help. It will take healthier people out of it and undermine it. Its best hope is Obama Care's ability to change the culture of health care, through the much-hated "Independent Payment Advisory Board.” Here the problem is not inherent in the government program, but in the way our Health Care system works. Unless we make the health care system more efficient, no amount of tinkering with the insurance system will make much difference. 

But we must recognize, that taking care of our future is more important than our entitlements, as important as they are. More revenue is fundamental to our future and a reversal of the redistribution of our wealth upward, is fundamental to our nation’s future. Tax Reform, most important, by taxing capital gains and dividends, as ordinary income is crucial. The permanent inherited aristocracy must be abolished, or at least reduced by ever-higher estate taxes, and preferably inheritance taxes, which are much fairer than estate taxes. 

We must, however, always be able to distinguish between aspirational goals and politically feasible ones. When aspirational ones must be postponed, we must accept compromises that are less than ideal, but that are better than an unacceptable status quo.

Finally, our present deficit is manageable, but the projected deficit, unless its trajectory is changed, is disastrous. Just because Republicans try to use it to gut, desperately needed expenditures, is no reason to deny what should be obvious. The issue should not be whether the projected deficits are acceptable - they are not - but that we must, and I mean must - deal with them with targeted cuts in spending, and there are many places where we can cut spending - reducing the prison population would be a good start, legalizing marijuana, etc. and increasing revenue, not only through the income and the estate tax, but by taxing carbon emissions and taxing discharges into our streams, where this cannot be avoided, taxing unhealthy foods, etc.

But whatever else we do - we must stop the trajectory in our deficit spending.

                       

In the meantime at the risk of causing this discussion to go on ad infinitum I still invite:

Comments, questions, or corrections, are welcome and will be responded to and distributed with attribution, unless the writer requests that he/she not be identified.