by Randolph T. Holhut
Chief of AR Correspondents
March 3, 2011
SOME COMMON-SENSE ALTERNATIVES TO FISCAL AUSTERITY
DUMMERSTON, Vt. -- There was an interesting post last week by Simon Johnson, the former chief economist for the International Monetary Fund, on The New York Times' "Economix" blog.
Johnson asked the question of whether there is a fiscal crisis in the United States. His answer is that while there are serious medium-term issues, by any standard of measure, our nation is not facing an immediate fiscal crisis.
The problem, in his view, is that the politicians and the media seem to think there is an immediate financial crisis, and they are driving policies on the state and national levels that are damaging to the nation's economic health, while ignoring the things that nearly collapsed the global economy.
"The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-8," Johnson wrote. "The ensuing recession and associated loss of tax revenue will end up increasing our government debt, as a percentage of gross domestic product, by around 40 percent. Very little of this debt increase was due to the fiscal stimulus; mostly it was caused by lower tax revenue, because of the slump in output and employment."
And, since nothing was done by either political party about the "too big to fail" banks and the excessive risk-taking culture that caused the current recession, another financial disaster is inevitable.
Another elephant in the room that Johnson identifies is out-of-control health spending. "The issue is most definitely not about cutting the current level of such spending or immediately reducing the benefits in Medicare," he writes. "But in the projections, by 2030 or 2040, the growth of health care spending ruins us all - whether or not we get the government to pay for it."
Once again, neither party made a significant effort to address this issue during the health-care debate of 2009-10. President Obama's health care made a half-hearted attempt at cost-control, but Republicans are hell-bent on repealing the bill, and have no coherent plan beyond repeal.
The last major problem, as Johnson sees it, is a "completely antiquated" tax system.
"For the same level of tax revenue relative to GDP, we could greatly reduce the distortions (e.g., disincentives to work) just by modernizing," he writes. "The right and the left agree that we should tax consumption more and income less, but neither is willing to make any kind of meaningful move toward a value-added tax (VAT).
"The right seems afraid that this tax will be too effective and power an expansion of government. The left thinks a VAT is inevitably regressive (imposing more burden on poorer people), despite all the evidence that the impact of VAT depends on how it is designed - because you can choose what gets zero taxes (e.g., baby clothes) and high taxes (e.g., yachts)."
So, in a nutshell, neither party wants to talk openly about how reckless behavior by our biggest banks led to a economic disaster. Nor is anyone willing to explain why our health-care costs continue to rise. And, when it comes to taxes, no one wants to see real tax reform.
"Both sides of our political elite have contributed to the sense of fiscal crisis," Johnson concludes. "And as we continue down this path - dangerous big banks, out-of-control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending and irresponsible rhetoric on both sides - we are well on our way to a real crisis."
Johnson didn't offer any remedies, but if we had political leaders with courage, intelligence and common sense, they would be considering these ideas:
Do these things, and you would see real progress toward putting the nation on a sounder financial footing.
Unfortunately, no one in a position of power in Washington possesses courage, intelligence and common sense to do these things. And too few Americans are demanding these qualities from their leaders so that we have a stronger, healthier, more productive nation.
AR's Chief of Correspondents Randolph T. Holhut has been a journalist in New England for more than 30 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at firstname.lastname@example.org.