If the world were run by economists, deficit reduction would be a very complicated balancing act. For politicians one question may well dominate all others: who is going to pay? The candidates differ from country to country, but the list usually includes taxpayers, public-sector workers, entitlement recipients (such as state pensioners or public-health users), foreign investors and future generations. Already battle lines are being drawn: witness the strikes by Greece's public-sector unions and the tea parties thrown by America's tax protesters.
--"Dealing with the budget deficits: Who pays the bill?" The Economist (3.4.10)
It amazes me that so many people I run into, hear of or read about--well-heeled, "middle class," or relatively poorer, all--believe that someone else should and will pay for the huge national budget deficit that is now visited upon us. Someone else must pay the cost of averting the worst depression in history. The middle class--and certainly those poorer--believe that they need lower taxes or more government help, even if most of them pay little or no income taxes now. And yes, I do know they still pay a considerable portion of their income in regressive social security, property and sales taxes. Then, too, retirees clearly do not want their social security payments reduced, even as some of them bluster and shake their fists incomprehensibly about the need for lower income taxes.
But the ones that amaze me most are the particularly well off or "rich," by some fair measure, so many of whom believe they have no responsibility or duty to play a larger role in reducing the choking weight of our national budget deficit. They have great difficulty seeing it as their patriotic duty, a service to their country required of them because they are the fortunate ones favorably positioned to provide it. And they are favorably positioned to provide it because they have taken full advantage of the opportunities and benefits of citizenship in the most open, representative democracy and the most robust market economy in the world. And it has made them financially rich or very well off.
Giving more in a time of national need is to them somehow unfair, too much to ask of them and their investment portfolios. And more, to suggest that social security should be treated more as social insurance for which a "means test" would determine their need for supplemental retirement payments can bring out an ugly, selfish side of many of them that might surprise you. It still surprises me. They want what is coming to them, thank you very much; let someone else save the country from its financial woes.
That's what it has come to. That's the state of patriotism and individual responsibility among many of America's most fortunate today. What is particularly ironic and galling to me is that these same people are so quick to deride and dismiss poorer groups and the working middle class as having an attitude of entitlement about social programs or fair labor practices. But yet, those same privileged folks believe they are entitled to avail themselves of all the opportunity America offers--and they have, often to extraordinary levels of wealth--but in tough times, do not feel obliged to give what only they can give to relieve the national burden, possibly to avoid continuing economic weakness or another recession. What a country. What patriots, these.
There. My unrepentant rant now done, and catharsis advanced, I return to The Economist article which offers some more global observations about the state of sovereign debt, world-wide--and who may be called on to pay for it:
The battles will be all the more fierce this time around because the deficits are so large and likely in the short term to stay that way. With developed economies still weak, many governments are (often rightly) keen to run large deficits for a while longer. But the bond markets are getting impatient, especially with weaker European countries. Greece was forced to announce a third austerity package this week, after its initial efforts failed to reassure either the markets or its neighbours (see article). Although Britain has a lower debt-to-GDP ratio than Greece and its debt has an average maturity of 14 years, sterling also wobbled this week, with investors spooked by the prospect of a hung parliament. True, the three biggest rich-world economies, the United States, Germany and Japan, are under less pressure. But Japan has high debt levels and America has the government-bankrupting cost of ageing baby-boomers.
Okay, so much for the backdrop of sovereign public deficits world-wide. What about solving the problem, and especially here in the U.S.? What about identifying resources and sources to liquidate these public deficits?
Two immediate answers appear, which should be easier for politicians to embrace than all those spending cuts and tax rises. The first is to be honest about the size of the problem...[V]oters can hardly make judgments about what to scale back if they do not know what promises have been made. The second is to focus on economic growth. Higher growth reassures markets, increases tax revenues and reduces spending on unemployment benefits and other welfare payments. So politicians should eschew policies that reduce the long-term growth rate, such as protectionism or higher taxes, and focus instead on measures that boost the growth potential, such as more flexible labour markets and other productivity-enhancing reforms.
All right, we are all for motherhood and apple pie. Truth telling and policies that facilitate growth will be welcomed by all. But notwithstanding the Economist's lofty perch on the free-market citadel--and I am a fan, as all know--most realists also insist that more short-term fiscal discipline is essential to deliver us from this mess. Reform of social security (read that, reduced benefits, or a reduction in the growth of benefit, or a delay in the age of qualification for benefits, or "means testing" for benefits, or all of the above), medicare administration and fraud, and other social programs, and some level of income tax increases for higher income taxpayers, will be required. So how about that?
The more immediate fight, which is already starting to break out in many European countries, is between taxpayers and public-sector workers, and between raising taxes and cutting public spending (see article). Politically, the contest is evenly matched, pitting powerful unions against the biggest taxpayers—corporations and high-earners—who often have the ear of politicians. In terms of economics, though, the bulk of the adjustment should come in the form of spending cuts.
The state had to step in during the credit crunch, given the scale of the banking crisis, but this expansion of its scope should be temporary. This is not just ideological bias on our part; economic studies suggest that fiscal adjustments that rely on spending cuts do better than those based on tax rises. Yes, some tax rises may be necessary, if only out of the political necessity of persuading the electorate that the burden is being shared. But tax rises, like Japan's in 1997, can kill a recovery.
It is probably not just ideological bias, but there is a healthy dose of it in there. And if we should consult what economic studies suggest might do better, we should also recognize the need and wisdom of timely addressing debt reduction and the state of national social cohesion. Income taxes are at their lowest point in a long time, and we as a country have in the past enjoyed a vigorous, high-employment economy with considerably higher individual income tax burdens. We can likely bear some level of higher income taxes now without material adverse effects on the progress of the economic recovery, or so economists opine in other places. And as the debt is paid down and the economy continues to strengthen, those tax rates can again be reduced. But to move responsibly and timely on debt reduction will likely require a more balanced approach, a fiscal policy that includes both spending cuts and tax increases. And in case you were wondering, those tax increases would doubtless apply to me, as well. But yes, Mr. Economist, you can have a last word:
Whichever path governments choose will be hard. As a period of loose credit gives way to an era of austerity, the social cohesion of many nations will be put to the test. Not all countries will pass. Over the next few years the careers of many politicians will be made and broken in the bond market.
Now, that observation is surely correct, and all the more reason to approach the available fiscal policy options erring on the side of faster solutions (spending cuts and tax increases) and, to the extent practicable, meeting social needs and preserving the strength of the social fabric.
http://www.economist.com/displaystory.cfm?story_id=15606221&fsrc=nlwhig03-04-2010editors_highlights
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