You Can't Do That In CONGRESS!
When I was a kid I watched a show on Nickelodeon called “You can’t do that on television.” It was a sketch comedy based mostly around fart jokes, buckets of slime or water being dumped on heads, and other predictable gags that keep me children in stitches.
One such recurring theme was “Opposite Day” where everyone would act counter their normal behavior with one character not realizing what day it was until they were tricked into calling a bucket of slime on their own heads. The thing is that even back then it was so transparently ridiculous that nobody older than 4 or 5 years old wouldn’t be in on the joke. Every observer knew exactly what was coming except for the target, that’s what made it funny.
Unfortunately Congress is engaging in it’s own “Opposite Day,” except in this case it appears not everyone is in on the joke and the consequences are considerably greater than needing to take a quick shower (political slime is harder to rinse off).
While simultaneously wringing their hands over the size of our deficit and accumulated debt, Congress is poised to extend the very tax cuts responsible for so much of it.
But Derek, aren’t you always saying how the government needs to spend more to get out of this slump? Yes. That’s because short term spending is aimed at replacing lost demand which is the problem the private sector is having.
These are not normal economic times when austerity could arguably be responsible. We have two substantial and somewhat countervailing problems, we need short-term government spending to take up the demand slack in the private sector but we also have a long-term budget deficit problem which is only made worse by prolonged economic problems.
Think of it like this, if you are a doctor and your patient’s heart has stopped beating, do you worry what a shot of adrenaline might do to their body or save their life first? It’s the difference between trauma care and eating right/getting more exercise.
The tax cuts for the wealthy cost the budget about $700 billion over the next 10 years but only $140 billion over the next two years. However, we know that they won’t spend all of that money. In fact tax cuts have proven to be one of the least effective means of providing stimulus. According to Mark Zandi, economic advisor to John McCain while he ran for President, the ROI of extending Bush tax cuts is about 29 cents on the dollar while a number of spending programs return well over a dollar.
Therefore, for $700 billion in debt we’re really buying $140 billion in the short term stimulus, that will return perhaps $40 billion in economic activity. While $140 billion in short term spending would only cost $140 billion in debt and return at least $186 billion in economic activity.
Am I crazy or does the choice seem really freaking obvious.
So the OPPOSITE of the smart thing to do in our situation would be to cut safety net and stimulative spending while prolonging non-stimulative deficit enablers like tax cuts for the wealthy.
Believe it or not, that’s exactly what Congressional Republicans and some Democrats are proposing. Opposite Day is BACK kids! I can’t wait to see Minority Leader Boehner covered in green slime… this is going to be sweet. Wait, it’s not a joke?
Crap.
So why not extend the tax cuts for a couple years until the economy recovers? That’s the “compromise” being floated by moderate Democrats. Because, as Paul Krugman points out in research going back to conservative economist Milton Friedman, the wealthy tend to view such temporary measures as transitory income… kinda like a windfall. If you won the lottery today you probably wouldn’t spend it all would you? Ok, my readers are probably bad examples… you heathens.
The point is that they tend to save it instead of spending it. That’s the wrong policy in a savings glut. Yes, it’s a good idea for YOU to save 10% of your income and pay off those credit cards just like your mother told you, but ironically, it’s terrible for the economy when everyone rushes to do it at once.
You might wonder why we shouldn’t end all the tax cuts then. What’s good for the rich is good for everyone else right? Wrong. The reason is that people in the lower brackets are liquidity constrained (again, see Friedman) so a reduction in any income, will result in further reducing demand. When you’re eating Ramen noodles for breakfast/lunch/dinner and get $1 an hour raise, it just means you can afford hamburger more often…. it’s not going in the piggy bank. Shorter: Poor people will spend their tax cut, rich people won’t.
The middle class is similarly hammered by having their credit-based lifestyle hammered and house they used as an ATM is now underwater. They’ll spend it too.
So logic can’t explain Congress’ behavior, then it must be politics. Clearly these tax cuts for the rich are very popular and that’s why they’re doing this. Oops, wrong again. Ending tax cuts for the wealthy is very popular.
The numbers: Twenty nine percent support ending only the tax cuts for the rich, and 28 percent ending all the tax cuts — meaning a total of 57 percent support letting the tax cuts for the rich expire. Only 29 percent, or less than a third, support the GOP position of keeping all the tax cuts in place.
So if it’s not economics and it’s not politics, what the hell are they thinking?
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