Thursday, February 12, 2009

Wingnut Heaven

Erick Erickson has a take on how to stimulate the economy.
The most radical, and effective, thing we could do for the economy right now is this: Stop collecting all forms of Federal business, income and payroll tax. EVERY PENNY OF IT. RIGHT NOW.

Gasp! Yes, I said it, and I meant it. Go on an absolute, 100% Federal tax holiday. That’s a real shot in the arm that would suddenly inflate the economy by a solid $1.5 trillion or more per year.

Are you worried about the resulting fiscal deficits? Don’t be. There is a huge amount of demand for debt from global investors, and the credit crunch has blown a huge hole in private debt formation. That leaves a lot of room for the government to borrow more.

As a spokesperson for a mindset that thinks all taxation is bad, Erickson is definitely doing his job. As a proponent of responsible governance, though, this approach is to say the least questionable.

Never mind that this is a great way for the federal government to avoid spending. Public spending has been a bogeyman for the Right as long for nearly a century now.

There's the debt issue to deal with. This is perhaps the most short-sighted proposition yet to come from the right-wing I've heard to date. While this might spur spending in the short term (I'll get to that later), debt is still an obligation, and one which sooner or later will have to be honoured. Erickson is silent on how that debt is ever to be repaid, regardless of what immediate income benefit it would present to Washington. Financing debt by selling more only digs the hole deeper.

Second, there's the problem that this only addresses federal issues, and thus only addresses federal taxation. State taxation isn't even touched by this item, and state taxes are no less burdensome. Further, state budgets depend on federal funds for many functions and projects, from highway and school construction through education, law enforcement and corrections. Unlike the federal government, nearly all state governments are legally obligated to balance their budgets, so deficit spending is not an option for them. Zero taxation equals zero federal investment in those programmes, leaving states on the hook for those expenditures. In Erickson's model, states will be left with the choice of raising their own taxes (negating the benefit of the federal tax holiday) or doing without. Already most states are amputating their budgets to account for reduced federal funds; imagine what would be cut with no federal funds.

Last, this proposal would address the issue only so long as the tax holiday persists and no debtholder attempts to cash in their bonds. The moment the debt is called, the federal government is in deep trouble, since the only way in this model for them to raise funds is to sell more debt - debt that, now that some of it is being redeemed, is of reduced value. As this spiral continues, the dollar would become geometrically devalued, which means the debt would spiral accordingly. Sooner or later the funding model becomes unworkable, and the odds are better for sooner.

Certainly, every business and every citizen that would see a meaningful benefit from the proposal immediately. That, however, leaves out any individual making less than $78,000: the raw numbers for them top out at $25,000 - and that assumes the benefit lasts a full year. With US median income at $61,000, and the top 10% earning about half the total income in the US, the key beneficiaries of this policy are clear, and the top earners are even more likely to conserve that income than use it to invigorate the economy. This, coupled with the recent negative savings rate, doesn't speak well for real benefit from this approach.

The single most striking facet of this argument is that it comes from a school of thought that has advocated fiscal responsibility since Reagan - even as its own actions have given the lie to that advocacy. Further, it would depend on the support of figures who as recently as last week denounced incurring additional federal debt for its long-term impacts.

There are only two rational conclusions to be drawn from all of this. One is that the Right is neither fiscally responsible nor particularly farsighted. The other is that the Right is so averse to public spending that it will do anything to avoid public expenditure on anything but its pet programmes.

H/T Hilzoy.

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