I want to talk a bit about the fiscal visions that the two parties are offering in this election, as it is the policy issue that is most important to me whenever I think about how to vote. Both sides have economists at the ready to defend any ludicrous idea and to couch any bad policy concept in economic theory that simply can’t be falsified. In other words, neither is prepared to deal with reality.
With any supercycle, there is an endpoint. To my thinking, we have reached that marker in the current one, which is built around debt financing at the individual, corporate and sovereign levels. Reading Irving Fisher and Hyman Minsky has been helpful in developing my view on this subject, despite my other reservations about their theories (and such ideas generally). They note that there are two outcomes when there is a huge build-up of debt in a capitalist system – either a debt deflation that flushes the system clean (but can take a while to play out and is painful for everyone) or government intervention to prop prices up and continue the march higher, but with greater instability underpinning the system. The choice in the United States, of course, has been a preference towards intervention. With every overreach on the upside, the decision has been to try and mitigate any downside. What we’re left with is balance sheets that get more and more bloated, and inflation risks that became more and more obvious and perilous.
The Republicans are feigning some sort of acceptance of Austrian principles. Spare me. There is nothing austere about what they offer up. More defense spending, more tax cuts, minimal spending cuts or diminishing of government’s role. The Democrats – well, they think everything can be paid for if we just wish for it hard enough. There are hard choices to be made, and there really is nothing about what either side brings to the table that suggests either is prepared to endure those consequences. The three areas of concern are defense spending, health care and social security. And, yes, social security is a concern (despite what some of the left-wing punditry say). Demographically, things are working against us (where there are fewer workers to support each new generation of entrants into the program), and the fact that the government commonly borrows from the trust fund to pay for itself, it seems highly implausible that they will ever be able to pay back those intra-governmental loans without further monetizing of the debt (which means any dollar paid in today is probably worth a whole lot less on the back end). I just started reading a book that talks about the issues of health care policy in this country, so I will hold off on that topic until finished, but it seems to me that the changes we currently see in no way lower the costs nor reduce the deficits over time. Finally, the military, another area where pork-barrel spending is just the norm and expectation (see Higgs, Robert). But, that’s what you get when most politicians are bought off and paid for.
So, to my original point, neither side is going to put this country on a sustainable path. They will default to interventions when problems arise, and further build out the bureaucracy that makes everything inefficient and more costly.
As it relates to taxes, I do think that a rising tide will lift all boats. If the economy is doing well, tax rates that are a few percent higher on the upper end will not stunt us. But, in the midst of a deep recession, not exactly a policy initiative that will engender entrepreneurship. At the same time, lowering taxes even more right now, not exactly the answer either (unless you implement some sort of tax holiday). Having said that, I think you could lower taxes if you were really prepared to get rid of loopholes, which neither party is. I think the interest deduction related to home ownership should be eliminated, both as a way to discourage speculation in that space, and to encourage the density in cities that I am now fully on board with for a host of reasons.
After going through the above, don’t misread me – there is a role for government. But, it needs to be measured and restrained. To have it plug the hole every time some Keynesian economist tells us there is a demand problem is to set us up for greater instability in the future and higher inflation. Neither of which is good.
So, in closing, I face a dilemma. And there’s not any clear solution on the horizon. Maybe Bill Fleckenstein has it right. Let’s just try every bad idea out there, have the absolute blow-up that will come, and we can move forward with a cleaner slate.
By that logic, the better question for me should be "Who’s worse?". Maybe they’ll get my vote.
