Saturday, April 30, 2011

Even a Stopped Clock

I often cringe at the average Economist what's-wrong-with-the-United States article. Sometimes, though, they get it right:

The first failing, of which Mr Obama in particular is guilty, is misstating the problem. He likes to frame America’s challenges in terms of “competitiveness”, particularly versus China. America’s prosperity, he argues, depends on “out-innovating, out-educating and out-building” China. This is mostly nonsense. America’s prosperity depends not on other countries’ productivity growth, but on its own (actually pretty fast) pace. Ideas spill over from one economy to another: when China innovates Americans benefit.

Of course, plenty more could be done to spur innovation. The system of corporate taxation is a mess and deters domestic investment. Mr Obama is right that America’s infrastructure is creaking (see article). But the solution there has as much to do with reforming Neanderthal funding systems as it does with the greater public spending he advocates. Too much of the “competitiveness” talk is a canard—one that justifies misguided policies, such as subsidies for green technology, and diverts attention from the country’s real to-do list.

High on that list is sorting out America’s public finances. The budget deficit is huge and public debt, at over 90% of GDP when measured in an internationally comparable manner (see article), is high and rising fast. Apart from Japan, America is the only big rich economy that does not have a plan for getting its public finances under control. The good news is that politicians are at last paying attention: deficit reduction is just about all anybody talks about in Washington, DC, these days. The bad news—and the second reason for gloom about what the politicians are up to—is that neither party is prepared to make the basic compromises that are essential to a deal. Republicans refuse to accept that taxes will have to rise, Democrats that spending on “entitlements” such as health care and pensions must fall. No real progress is likely until after the 2012 presidential election. And the antagonism of today’s deficit debate may even harm the economy, as Republicans push for excessive cuts in next year’s budget.

I disagree that Republicans won't accept tax hikes. I think that the Ryan plan to lose many deductions, and lower rates is a tax hike of sorts. Yes, rates would go down, but eliminating the complex deductions that allow people like Stephen King to avoid the top tax bracket will make up for it. I'm assuming here that the rates would go down enough to make up for the loss of home mortgage deduction in the average middle class household. I don't think the top bracket needs to rise in order to get more money out of top wage earners. Making people like Tim Geithner and Stephen King actually pay all their taxes, that would be enough.

Simplify the code or give us all top tier accountants and Section 179 Alpaca Ranch deductions.

The worst case scenario: Obama, and his media helpers, will be able to fool the "I won't have to worry about buying gas or paying my mortgage again" crowd. They should have realized by now that there is no magic. But if they're blind enough to vote for the next, new, reinvented Obama, well then we're in for real pain.