Politics

I probably shouldn’t get my hopes up, because it’s looked like it before, but I’m starting to wonder if the 2012 election may mark the start of us climbing out of our long national delusion.

A common post-mortem from all sides of the aisle in the aftermath of the election, starting even on election night, has been hand-wringing over the future of the Republican Party. I’m not going to read too much into the Republican Party’s inability to defeat President Obama with the worst unemployment to get a president re-elected since FDR; this just so happens to be the worst economic downturn since the Great Depression, and people still pin the blame for it on the Republicans. Still, it’s incredible to follow the arc of the Republican Party over the last decade-plus.

Back in 2008, I suggested that the abuses of the Bush administration had so tainted the image of the Republicans that an Obama administration would either pave the way for a serious third-party or independent run in 2012, or give the Democrats a blank check for a generation. What I didn’t anticipate was the complete re-brand of the Republican party that the Tea Party constituted, as the complete antithesis of everything the Bush administration amounted to, whether or not it actually practiced what it preached. Nor did I anticipate that the Tea Party would completely hollow out the Republican Party before flaming out, effectively forcing it into a substandard candidate – running as a moderate four years after running as the conservative – because he was the least crazy of the bunch. (Meanwhile, the Tea Party’s godfather, Ron Paul, for some reason barely did better than in 2008, which probably says a lot about the honesty of the Tea Party’s position.)

Nor did I anticipate that by the time it was through, the Tea Party would leave the Republican party in shambles anyway, the last flameout of a group of old, crusty baby-boomers unwilling to face up to the fact that their power is inexorably waning. Now it’s hard to see where the party’s future realistically lies. They’ve spent years antagonizing minorities when the country is soon to become a majority-minority nation, including the Hispanic community that might have otherwise seemed to be their future base, not to mention women, who are only half the country’s population, and the cities, where the population will continue to concentrate, and when everyone lives in global-warming-induced hell they’ll remember that it was the Republicans who closed people’s eyes to it even as it was happening. Perhaps most worryingly, while the last four years have hardly been sufficient to give the Democrats a blank check for a generation, no one in my generation will ever in their right mind identify as a Republican. It’s entirely possible that going forward, 300 electoral votes will be the bare minimum for a Democratic presidential candidate against a Republican opponent.

This isn’t a recipe for good government. It’s a recipe for some pretty bad people ending up in positions of high government and, were it not for the Democratic propensity for hand-wringing even when they have the numbers to ramrod any bill they want through Congress, the remaking of the country to fit a particular political agenda, even when that agenda might be wrong. The Republican party has been a force in politics for over 150 years, longer than any other opposition party to the Democrats and indeed well over half the entire history of the two-party system, but now it may well be in bad enough shape that it’s in the twilight of its power and influence. The two-party system is bad enough, but the country cannot long stand as a one-party system. If the Republicans are falling away, we’re going to need a new party as a replacement.

What is needed is a political party that can defend the principles of small government and the free market while still being rooted in reality, that isn’t blinded by ideology but can actually propose sensible solutions that doesn’t increase reliance on government or strangle the economy, taking over for Republicans as they wane and standing up to Democrats where they’re strong. To the Tea Party, it can position itself as the true defender of small government, abstaining from blindly throwing several times more money at defense than we actually need; to the Occupiers, it can position itself as the true defender of the people, making sure that corporate oppression isn’t merely replaced by government dependence. Perhaps that can involve a takeover of an existing political party, though as above I don’t see anyone of my generation swallowing their pride and becoming a Republican anytime soon. Perhaps people can flock to a third party, though those tend to be filled with extremists once you dig far enough into their positions, since all the sensible people are working within the two-party system, and they’re not likely to compromise their principles. Or perhaps it’s time for a brand-new political party that can bring balance and common sense into politics.

Whatever the case, if we are witnessing the twilight of the Republican Party, it’s imperative that we get to work building its replacement, and building its rise through the halls of power, in the hope that a reset political landscape can bring the American political discourse back to sanity and reality.

It’s not hard to figure out why the government has so much trouble balancing the budget and why the national debt keeps ballooning. Americans like their taxes low and their government services high. Democrats fancy themselves Robin Hood, taxing the rich to play for government services for the poor; Republicans want to cut services so they can lower taxes, and both parties are generally only successful at making things worse for the government, but not before wasting a lot of time arguing about it.

The debt ceiling, last year’s “crisis” should have made clear, is wholly ineffective at forcing the government to keep spending down. A balanced budget amendment isn’t the answer; states have balanced budget requirements and lose massive amounts of money anyway because of the use of Stupid Accounting Tricks to hide gazillions of dollars in expenditures off-budget, and in any case such an amendment would rob the government of flexibility during war or recession. What’s needed is to encourage the government not to overspend or undertax during the strong years.

We had a surplus during the Clinton years, when a Democratic president, a Republican Congress, and a strong economy collided to wipe out the budget as a problem. We’ve seen some elements of the solution – bringing defense spending more in line with what America actually needs, for example, and if health care reform works it should actually increase government revenues as health care’s drag on the economy is reduced and the government recoups savings from waste – and we’ll examine more specific points of spending in future posts. In this post, however, we’ll look at more general principles of budget management and taxation.

First, let’s consider how the Republicans claim they can have their cake and eat it too, the Laffer Curve. It seems simple, even obvious: If the government collects tax at a rate of 0%, obviously, they won’t collect anything. On the flip side, if it collects tax at a rate of 100%, no one will be left with any reason to do anything, and the government still won’t collect tax. Hence, it is possible to actually increase government revenues by lowering taxes.

But it doesn’t take long to find problems with it. For one, it seems to rely on an overly rational view of human nature. The Laffer Curve came to prominence during the Reagan years and the 100% tax rate was said to represent what happened in the Soviet Union… except the Soviet Union seemed to work just fine for around 70 years. Most people will do things for reasons other than monetary gain, whether because they’re forced to or they just like the work; I’ve been working on Da Blog for over five and a half years and have barely seen a dime from it.

On the flip side, both the theory and practice of capitalism suggest that people will attempt to squeeze out every last penny they can for themselves. I can’t imagine why the sort of person basic economics proposes, living under a 99% tax rate, wouldn’t still try to do as much work as they could in order to squeeze out that one percent. Granted, this wouldn’t leave people with much money to spend on keeping the economy (and themselves) running, but the government itself could still contribute at least a little to the economy, even if not very well (as in the Soviet case), and both of these still seem to suggest a peak in the Laffer curve somewhere greater than 50%, possibly substantially greater. Right now, the highest marginal income tax rate the United States government levies is a measly 35%.

Until the Reagan years the highest marginal tax rate was 70%. During much of the 50s and until 1965 it was as high as 90%. From the 50s until the Reagan years the top 1% represented less than 10% of all income before taxes, probably closer to 5%; now it’s upwards of 20%. You think maybe there might be a connection there? What if I told you that the lowest marginal tax rate was 10%, not much lower than 35%?

The Tea Party’s counterargument to this is to question the premise of taxing the rich more than the poor at all, which smacks of penalizing the rich for success, stealing their presumably-legitimately-earned money, and implicitly demonizing them. For all that they attack them, after all, the vast majority of “the 99%” would trade places with the 1% in a heartbeat. Many Tea Partiers would rather do away with the progressive income tax entirely, in favor of one of a number of flat tax schemes, and cut back heavily on government services for the poor that provide less incentive to advance to a higher class, and thus less incentive to work. The left, they argue, think that the rich shouldn’t have any advantages over the poor, when that would defeat the purpose of work in the first place. There’s not really any reason for the government to be in the business of redistributing the wealth, and it’s not clear that there’s much economic benefit either; in fact, the rich are more likely to invest their money because the poor have to spend it on their needs, and the former is ultimately better for the economy, since it actually builds the engine instead of just running it.

It’s not an argument that should be dismissed out of hand, though the answers to the questions raised by the “Horatio Alger argument” are mostly out of the scope of this post. We should first mention, however, that to my knowledge, in our tax system no one ends up with less money by making more money. I referred to marginal tax rates earlier; that means that those tax rates only apply to the next dollar you spend. All the income you make within a previous tax bracket is taxed at the rate of that tax bracket. There is no “jumping” from the government taking 10% of your money at one level to 15% of it on the next. By the same token, no one would dare take 80% of a poor person’s money, even if a rich person is also being taxed at 80%.

For now, let’s shift our focus away from communistic “he has more than me and that’s wrong” questions and focus on the question of whether people have enough. Let’s shift the discussion away from “the 99%” and “the 1%” and towards “the 15%” of people that met the Census Bureau’s definition of poverty in 2010 (incidentally, the highest rate since Clinton took office). This could simply refer to people with a lot less money than the super-rich. Or it could refer to people who spend all their money on keeping themselves alive with nothing to spend on anything else, and not necessarily doing a good job of that, so that they end up spending a lot of money on junk food. It could refer to people who live in poorly-constructed houses or apartments, possibly in intense filth and squalor and near sites of pollution, if they have a home at all. It could refer to places where people have so little that gangs arise to protect what they do have and drugs become rampant to take one’s mind off their condition, leading to mass imprisonment.

It may not be clear that redistributing the wealth is within government’s purview, but reducing poverty surely is, at least indirectly, allowing the government to spend less on prisons, the health system, police, and the drug war. If nothing else I could argue for the provision of basic income or negative income tax, a compromise whereby the Tea Party gets their flat income tax (perhaps in the 20-50% range), but the government also pays a flat amount to every citizen in the United States. This wouldn’t be enough to allow or encourage people to stop working en masse, but it would be enough to keep people alive and give them a place to live; I’d imagine it would be at least as much as a part-time minimum wage job, perhaps the amount of the federal poverty level. That might allow for the dismantling of most welfare programs, as well as cuts in other programs such as Social Security, which might mean the government comes out ahead in the long run.

(The FairTax proposal advanced by some within the Tea Party contains elements of this, replacing the income tax component with a sales tax that has the added effect of encouraging investment, though relative to current tax policies it would hit the middle class harder than the wealthy, and such a tax (probably more than double current state sales taxes, close to triple) could result in massive evasion.)

We’ll see in later posts how, Horatio Alger aside, the rich tend to have advantages that mean their children are far more likely to stay rich than poorer children are to become rich; for example, investment is not only better for the economy, but it also ends up returning money back to the investor, allowing the rich to get even richer. There are probably better ways to correct this imbalance than simply taxing the rich more, but I do have a problem with lowering or repealing the capital gains tax, as it smacks of opening a loophole in the income tax system (I’d support making the capital gains tax equivalent to the income tax), and I’m actually a bit mystified as to why anyone who supposedly believes in the ideal of Horatio Alger would oppose the estate tax, as it lessens the “Paris Hilton effect” of simply having daddy’s fortune plop into someone’s lap without doing any work. Since land isn’t something you actually work for, but rather is something that’s just there, I could also see the argument for a Georgist tax on land value, which could also have environmental benefits.

By raising taxes on the wealthy and/or reforming and simplifying the tax code, combined with finding a way to curb pork, unnecessary and harmful subsidies, and wasteful spending, and enacting reforms in other areas of government, we can create a streamlined, efficient government that works for everyone and still makes headway on the national debt. That’s a vision of the government that everyone can get behind.

Economics quiz: What is the best response the government should have to a recession? Is it:

• A) To hand out a bunch of tax cuts?
• B) To spend money on public works projects?
• C) To do nothing?

Most economists would probably answer B. To see why B is a better answer than A, consider this scenario: Suppose there are two governments. One decides to give $1000 to the wealthy, the other spends $1000 on public works projects. Ultimately, all the money the second government spends on public works projects is going to make their way into the hands of people, whether construction workers, contractors, extractors of natural resources, you name it. So both governments are giving $1000 to various people, but the first government is handing it out for free while the second government is actually getting something for their money – and that something might benefit people who won’t directly receive any of the money, for example, the construction of roads.

A sizable chunk of the 2009 stimulus, on the other hand, went to tax cuts and maintaining the status quo for various government programs; arguably less than half went towards actual things the government could get for its money, and several economists voiced concerns that the whole thing wasn’t big enough to make enough of a dent in the recession. What’s more, the Congressional Budget Office raised concerns that the stimulus could actually be bad for the economy in the long term by adding to the nation’s debt and potentially crowding out private investment.

In any case, faced with this apparent recommendation against free markets and for bigger government from a field they normally depend on to recommend the opposite, the Tea Party would probably recommend C, do nothing – in fact, maybe even go in the opposite direction by loosening restrictions they see as holding the economy back. (Mainstream Republicans, on the other hand, seem to want to answer A.) Despite the prevalence of Keynesianism, there are certainly enough economists willing to argue that any government interference in the marketplace is bad no matter how bad the economy gets. It’s worth noting that no projections seem to indicate that the stimulus would actually shorten the recession, in terms of a return to baseline GDP, only make it less severe. There is evidence that the stimulus has created jobs that wouldn’t otherwise exist, and any failure to meet the unemployment targets projected at the time is more because the recession itself was even worse than thought at the time, but it’s not clear that that alone should be the goal. On the other hand, most Keynesians would argue that the government should depress the economy when it starts riding too high, to prevent it from crashing and causing a far worse recession.

What this gets at is the question of what the government’s policy towards the economy should be: whether it should take an active role in creating optimum conditions for the economy to function, or whether that sort of thing just causes recessions in the first place? Even the people who are supposed to be experts can’t quite agree, so I sure as hell won’t even try to resolve the debate, and should someone like Ron Paul become president they would probably attempt to get the government to take a more hands-off approach. In turn, that debate is even further bound up in the debate about the government’s role in everything else, as opposed to the free market, and the appropriate level of taxation, raising a whole other set of issues.

That said, Keynesianism is mainstream enough that my introductory macroeconomics text seemingly presented it uncritically, and its most well-known critics, the Austrian School espoused by Ron Paul, are mostly rejected by most mainstream economists, since we haven’t had anything resembling even the depressions of the 19th century since the government took a more active role in the economy starting in the 30s (though the present recession has come close). Besides, the truth is that the government isn’t likely to take its hands off the economy, or anything else, anytime soon. Thus, I would tentatively support the stimulus, a larger stimulus, and a more spending-focused stimulus. As much as I don’t want to give more power to government, ultimately a lack of jobs are what’s at the heart of the Occupy movement, and if the stimulus can provide them, and it’s not clear anything else would, more power to it. Besides, many of the things the stimulus pays for are things the government, for good or ill, essentially has a monopoly on, things the free market ultimately relies on even if it might do better at it were it forced to take over.

What this touches on, though, is the central disagreement in American politics between the right and the left. The right believes the government should be as small as possible and not go meddling in people’s lives; the left believes the government has a duty to create good lives for everyone. If the government were wholly committed to one or the other it would probably produce the optimum effects each approach suggests, better than the compromise-enforced status quo, but since there remains disagreement over which approach is really best we end up with a mix of both worlds. Is there a way to get the best of both worlds, allow people to live their lives as they choose without the negative consequences that implies? I’ll attempt to answer that question as this series continues, starting with quite possibly the biggest and most telling example.