Friday, July 16, 2010

Cutting taxes and slashing spending to deliberately keep the fiscal crisis alive

Republicans hope to seek advantage in this fall’s midterm elections by stoking fears about federal budget deficits while at the same time pandering to voters with appeals to lower taxes. Assuming their concerns about the deficit are real (and they aren’t) then how can they advocate lower taxes at the same time? There are two possibilities. The first is that despite the facts and common sense a majority of the leadership of the modern Republican Party is clinging to a cut-taxes-at-any-cost-ideology regardless of whatever the consequences its impact has had and will continue to have on our economy. The second possibility is the “starve the beast” scenario. In other words, they are well aware tax cuts will only deepen the federal deficit but their real motive is to keep the financial crisis alive in order to slowly dismantle government program by government program they dislike despite the consequences for our society.

Paul Krugman explains:
… Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.

But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P.

Why should this scare you? On paper, solving America’s long-run fiscal problems is eminently doable: stronger cost control for Medicare plus a moderate rise in taxes would get us most of the way there. And the perception that the deficit is manageable has helped keep U.S. borrowing costs low.

But if politicians who insist that the way to reduce deficits is to cut taxes, not raise them, start winning elections again, how much faith can anyone have that we’ll do what needs to be done? Yes, we can have a fiscal crisis. But if we do, it won’t be because we’ve spent too much trying to create jobs and help the unemployed. It will be because investors have looked at our politics and concluded, with justification, that we’ve turned into a banana republic.

Of course, flirting with crisis is arguably part of the plan. There has always been a sense in which voodoo economics was a cover story for the real doctrine, which was “starve the beast”: slash revenue with tax cuts, then demand spending cuts to close the resulting budget gap. The point is that starve the beast basically amounts to deliberately creating a fiscal crisis, in the belief that the crisis can be used to push through unpopular policies, like dismantling Social Security.

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