GOP Base: Spending Cuts Now, or Never
One thing that I hear over and over from my conservative interlocutors on the budget is that they need spending cuts right now because they just don't trust the Democrats (or indeed the Republicans) to make spending cuts in the future. If they don't get the cuts now, the reasoning goes, it will be "jam yesterday, and jam tomorrow, but never jam today."
I certainly understand the worry, especially after Democrats and their own leadership pulled the cute trick of enacting a bunch of sham spending cuts in the last round of negotiations. But here's the question: why do you think spending cuts now will be any more likely to stick than spending cuts tomorrow? Anything you enact now, under threat of the debt ceiling, can always be un-enacted tomorrow.
Oh, sure, default would make it pretty hard to borrow money to fund new spending. But what makes you think they won't raise taxes to fund new spending instead? You cannot credibly bind future congresses to your will. If people want Medicare more than they fear tax hikes, they'll get Medicare, and tax hikes. And that is true whether or not you default. Eventually, we will close the budget deficit one way or another. Default does not make it any more likely that you will get your way on government spending. Indeed, it makes it somewhat less likely, because--however justified the tea party may feel--for the swing voters in the center, the proponents of smaller government will now look like The Party of Crazy.
Institutions are important, but in a democracy, there are no institutional shortcuts to credibility. I wrote this years ago about the gold standard:
The lone advantage of a gold standard--and it is a real advantage--is that it prevents governments from inflating the currency. The problem is, this is only moderately true. The government, after all, can always modify its gold standard. Yes, you say, but it will pay a price in the markets, and this is true, but this is the same price it pays when it prints more fiat currency. Such practices do not go unnoticed for long.This is also true of the current standoff. You cannot get anything out of a default that you didn't put into it. Don't have the national political consensus to cut Medicare/Medicaid/Social Security? Won't have it after we default, either. Don't trust future governments not to increase spending? Default won't stop them from, say, raiding your 401(k), the way Argentina did with its private pension funds.
As James Hamilton has pointed out, gold-backed currencies, like all money with a fixed exchange rate, are subject to speculative attacks whenever the government's financial position looks weak. Such speculative attacks often require punitive economic measures to fight off, which is one of the reasons that America suffered so nastily from the Great Depression--it raisedinterest rates in the middle of a recession in order to defend the credibility of its currency.
. . . In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg).
Of course, maybe tying the joy of spending to the pain of taxes will make spending harder. But forgive me if I point out that the advocates of this position seem to want to have it both ways; they favor tax cuts because it will "starve the beast", and then they favor default because apparently deficits make spending too damn painless. You can support one of these, or the other, not both; if the latter is true, then the Bush tax cuts were an actively terrible idea that let Congress off the hook for controlling spending.
Moreover, as I pointed out in the earlier post, forcing the Democrats to choose between default and massive spending cuts might backfire, making it more likely that Democrats get a sweeping majority which enables them to do most of the budget closure with higher taxes. Once you've defaulted, there are no backsies; we'll be stuck with closing the budget gap in the middle of a recession and some pretty substantial capital flight, which you can expect to produce a pretty significant further decline in the tax take. Why would you want to take such an enormous gamble? I know, you're convinced it will pay off. But just consider for a moment that you might be wrong. There is surelysome chance that you have miscalculated, genius though you may be. What then?
You may think that people in DC live in a bubble. You may even be right. But the longtime residents of this bubble have all spent a lot of time studying one subject: how people get re-elected. And they all seem pretty sure that defaulting on our debt, or shutting down the Social Security system, are not it. If you worry that you cannot secure a credible committment on future spending cuts now, think about what sort of credible commitment you'll get when there are 280 Democrats in the House.
5 comments:
It is a hard article to read but the gist of the article is that something needs to be done. Whether you side with the conservative, moderate, or liberal side, someone needs to decide something. What the author is stating is that if the conservatives chose to sweepingly cut social security, medicare, or medicaid, the democrats will win because most people do not want these items cut. The end result will be higher taxes. Is there something in the middle? What do you think?
The author made some valid points in his article. Any spending cuts that are passed are repealed in the future. Also if the government defaults or the debt ceiling is reached, it brings along positive and negative consequences. For example, Greece has been broke for quite sometime now and still hasnt found a solution to its debt. If the United States goes down, I believe political chaos will be rampant because Congress will be trying to put together a debt package deal and the people will not support parts of it.The only middle ground I see is if both parties agree on spending cuts that take effect immediately, instead of 5, 10 years from now, and raise revenue by raising taxes but I cannot see this happening. The only reason Social Security is in trouble is because it lent money to the US government for its debt and has not been reinbursed.(Mr. Cerda) As to a solution for this problem, both parties need to stop playing the blame game and get something done. We have both the NBA and NFL lockouts if we want to hear about the blame game. A solution would have to include spending cuts and higher taxes except nobody wants these things.
Cut federal spending and raise taxes. It sounds way to simple and I assume it is, if the great minds running our country haven't thought of it. It's a little bit country and a little bit rock n roll. I think both conservatives and liberals can walk back to their parties with a sense of victory (if that's what they're worried about.)
And I would have to disagree with Osiel on one point,(although doing a great job.) I really want to see higher taxes. I see little to no benefit from the Bush tax cuts, and I highly doubt Obama can convince the rich to fulfill their their part of the tax cuts and create new jobs.-- Side note: Not entirely sure if this made sense, since I cannot go back and read why I just typed.
Very valid points. I do not see Tax hikes anytime soon since we have a conservative Congress. I wish that they (Executive Branch and Legislative Branch) would stop worry about being reelected and work to fix our problems.
Democracy has no short cuts, things take longer to get done, but everyone has a say. Cutting social security, medicare, or medicaid, in my opinion cannot be done. The democrats would not allow it. It just seems as if there is no solution to this problem without taxes going up. The thing is, I can't see a president responsible for shutting down the Social Security System being re-elected so the cuts can't be secure. In the end, only time will tell how things will play out.
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