Steve Rattner: When Right Thinking is Just Plain Wrong

by gradycarter

When Right Thinking is just plain wrong.

I didn’t understand for a long time why cutting spending too quickly is a threat to the economy (and even in saying that I can feel eyes being rolled at their computer/phone screen), but I had always been told that it would put the money back into the people’s hands and in to the market, and thus spur the economy to cut taxes. And while this might not be the main purpose of this article I think that it is a very good lesson in economics for Joe six pack. Saying that cutting cutting government spending will help the economy draws a picture that can be deceiving (not to say that the people shouldn’t have control of their money), but what actually happens when there are tax cuts is that people pay off debts or invest in savings (and both of which are great things for citizens). But what does this mean for the economy as a whole you ask – well this means that all of that money that the government is spending (whether rightfully or not) will not be spent at as quickly of a rate if it were put in the hands of the people, which would in the immediate slow economic growth more likely than not. I’m not arguing that the government should always maintain control of the people’s wealth, but as you’ll read below Mr. Rattner makes an analogy about stopping a car too quickly, and that is how this conversation needs to be changed. For any science buffs out there, government spending levels should be talked about more like the rate of acceleration and deceleration in order to gauge immediate economic impacts, but of course this is relevant if the conversation is about the immediate economy. Enjoy the article, I always love what Steve has to say.

-Grady

*An Addendum:
I asked my very intelligent and well educated, conservative friend to share his thoughts on this post and he responded under the condition that he remain anonymous. His response is at the very bottom of this post.

When Right Thinking is just plain wrong

Originally published in the Financial Times

During the past few weeks in the FT, the “Right Thinking” warriors of the Republican party have laid out their manifesto in broadly appealing principles rendered so gauzily as to nearly erase from history the hard-edged specifics that some of these same authors have sworn allegiance to.

But then the memories of GOP dogma kick in: vast, unaffordable tax cuts; evisceration of social welfare programmes; deep cuts in spending on practically everything else, from food stamps to national parks; steadfast opposition to gay marriage; intimations of harsh treatment of the US’s 11m illegal immigrants.

And on and on. The contrast between the high-minded commentary that appeared in these pages and pre-existing policy proposals could not be starker.

Proving that his silver tongue is matched by a silver pen, Congressman Paul Ryan issued a call to “restructure” entitlements so “important programmes can succeed well into the 21st century”.

In fact, what he has proposed in his draft budget is to transform Medicare from an entitlement programme in which seniors receive the care that they need into a voucher plan in which the elderly would receive a fixed allotment to buy their own insurance. If that amount proves insufficient or the insurance does not deliver adequate coverage, well, tough luck!

Medicaid, healthcare for the poor, would suffer a different, but equally disabling fate. It would be turned over to cash-starved states, the fiscal equivalent of being sent to the knacker for execution.

Meanwhile, Glenn Hubbard says the US needs to fix its riddled tax code and get its fiscal house in order. Well, of course it does; every sentient American knows that. But Mr Hubbard blithely ignores the plan put forth by Governor Mitt Romney, who he is advising: 20 per cent across the board tax cuts costing $2.8tn over the ensuing decade, to be paid for by closing loopholes that Mr Romney has refused to specify (apart from two minor items.) Even in a cynical age, that is cynicism of mind-boggling proportion.

The Romney/Hubbard tax plan would not result in net additional revenues, which means reducing the deficit would require spending reductions on a vast and – I believe – politically unacceptable and socially undesirable scale.

Finally, Mr Hubbard offers up the thoroughly discredited argument that deficit reduction can spur near-term economic growth. He should ask the British (or the eurozone members) how that austerity stuff is working out for them.

Amid all the disingenuousness lie a few hopeful wisps. Senator Olympia Snowe’s cri de coeur for the GOP to retreat from its extremism to the centre right is welcome – even coming on the eve of her retirement – as is the estimable Jon Huntsman’s call to embrace the progressivism of Theodore Roosevelt, a giant widely admired across party lines.

But that same Teddy Roosevelt was the first president to espouse national healthcare, while Mr Huntsman, a former Utah governor, advocated repeal of ObamaCare during the Republican primaries. Now he says full repeal of ObamaCare is “unlikely” and wants the “pointless sound bites” dropped.

Barack Obama mostly escaped a direct lashing. Instead, Republicans were sure to include code words to subtly identify the incumbent’s alleged failures: “defeatism”, “crony capitalism”, “ad hoc responses”, “bureaucrats” and the like.

In fact, Mr Obama is far closer to the right approach than his Republican nemeses. Putting in place a long-term deficit reduction plan is an urgent priority but it should be balanced between tax increases and spending cuts and phased in gradually, just as a speeding car should be decelerated slowly.

US spending on social welfare programmes can be curbed humanely, without gutting the social safety net. And of course policy certainty would benefit business and consumers alike. But let’s put the blame for the current drifting where it belongs: on Congress.

By all means go back and read the Right Thinking series, just also be sure to read the transcripts of the Republican presidential debates and the policy papers of Mr Ryan, Mr Romney and others who form the true core of the Republican party.

ADDENDUM: here is my friend’s response

I understand your economic argument that gov’t spending goes straight to the bottom line of GDP immediately. However, borrowing money for our government to spend today brings forward consumption from the future as you know. So look forward fifteen years and understand you have pulled economic activity from this America to the America of fifteen years ago and oh by the way we borrowed money to do so, so we have to tax the citizenry higher than we would have. You have a situation where we have less growth already and then you have to tax higher just to service your debts….not a winning proposition….Also, where I throw my hands up with that spending=growth at any cost bull shit is that it assumes that any single dollar spent is good for economic growth regardless of how that dollar is spent. This clearly does not pass the common sense test. Do we really think failed solar companies are on equal footing with whatever business idea did not get funded in the private market place because of crowding out of capital…..fuck no when we put it like that. Also let us not just look at the surface of what happens with a funding a shotty solar company (it is just an easy target so I’m using it). The government obviously spends the money….they either tax or borrow money to do this…borrowing the money implies taxation later to repay the debts along with their interest or inflationary policies which as you know are a hidden tax. So they spend the money on this solar company….the citizens who have already been taxed have to pay more for their energy bills because solar does not work out so hot. Then you have a citizen you has been taxed (today or later) paid more for his energy bill and has nothing to show for it……is this representative of economic growth….no

Sorry for any grammar errors I was going fast.

I do think you opinion is a valid one for 10 years ago.

I appreciate his response, and I think that this gets us closer to a more constructive debate.