Let’s hope so.
A year ago, the world’s markets were watching Europe with rising fear. Some expected 2012 to be the year that the euro zone broke up. Germany did not want to pay to bail out its less fortunate neighbors unless they agreed to severe austerity and to what amounted to a surrender of sovereignty — ideas that other countries were loath to accept.
What ensued during the year was a series of summit meetings that often seemed to do more for the hotel business in assorted European capitals than they did to solve the problem. Agreements in principle were announced, sending markets up, only to stumble back when the details got difficult.
What the naysayers missed was that there really was a common commitment to save the euro, and that in the end politicians and central bankers would do what was needed to avert disaster. Finally, in July, the European Central Bank came up with a plan that assured the euro area banks, and the troubled governments, that they would have access to money at reasonable rates. Angela Merkel, the German chancellor, went along, angering some of her German colleagues, who thought she was straying from basic principles.
So it could be in the United States Congress. The outgoing Congress went up to the final minutes, amid much angst, before it averted the fiscal crisis. There are reasons to grumble about the details, and more deadlines loom in the new Congress, but the essential point was that in the end the House Republicans allowed a bill to pass even though a majority of them opposed it.
John A. Boehner, the speaker who has often seemed scared to do anything that his Tea Party colleagues might oppose, not only allowed the vote but chose to vote for the proposal. The first indication of whether this is a new dawn, or simply a case of the House Republicans being outmaneuvered, could come when the debt ceiling is addressed. Logically, the debt ceiling is an absurd vote to begin with. Raising it simply allows the government to pay the bills for spending the Congress already approved. To allow the spending bills to pass, but to then refuse to raise the debt ceiling, is equivalent to a family deciding to refuse to pay the credit card bill while continuing to spend. That will only accomplish destroying the family’s credit.
Perhaps some Republicans will threaten to keep the country from paying its bills to accomplish something they don’t otherwise have the votes to accomplish. But if the European precedent holds, the final result will at least avert disaster.
Whether more than that can be hoped for may depend in part on whether those screaming for major cuts in federal spending actually believe their rhetoric — the talk about the United States becoming another Greece.
The reality is that the current budget deficit largely reflects two things: exceptionally low government revenue and the continuing problems caused by the financial crisis and recession that followed the bursting of the housing bubble. Bringing tax revenue back to historical levels, as well as the growth in revenue and reductions in spending that will automatically follow an improving economy, will make a major difference.
There are issues that must be addressed regarding health care costs and Medicare, as well as the fact that there will be fewer workers for each retiree as the baby boomers retire. But those who see a Greek-type crisis here should ask themselves why the government can borrow at interest rates that remain extraordinarily low. The world’s trust in Uncle Sam’s ability to pay its debts has remained high.
What are not high are taxes, although a poll would no doubt show that many people think otherwise.
Federal taxes, relative to the size of the economy, are significantly lower than they were after Ronald Reagan cut them. During 2012 federal revenue amounted to around 17 percent of gross domestic product. At the Reagan low point, the figure was a full percentage point higher. In 2009, when the deficit was ballooning, the figure fell below 16 percent, something that had happened only once during the more than 60 years for which comparable data is available.
Back in 2000, federal revenue approached 21 percent of G.D.P. The assumption that such strong collections would continue played a major role in the forecasts of budget surpluses as far as the eye could see. In 2001, aides to President George W. Bush pointed to the figure as proof that Americans were overtaxed. It turned out that tax revenue figures were temporarily inflated in two ways by the bull market in technology stocks. Not only were there a lot of capital gains to be taxed, but soaring share prices also produced a lot of ordinary income for those employees and executives who could cash in stock options.
At the time, it was assumed that such options had no significant impact on tax revenue, because the income that went to the employee provided an offsetting tax deduction for the company that issued the options. That might have been true had the companies been paying taxes, but many of the most bubbly stocks were in companies that never had, and never would, pay a dollar in income taxes.
That revenue would have come down sharply after the technology stock bubble burst, even without the Bush tax cuts. But those tax cuts worsened the situation and are a major cause of the current deficits.
It might be interesting to consider what would have happened in the 2012 presidential campaign had either candidate been willing to, as Adlai Stevenson once said, “talk sense to the American people.”
In reality, neither candidate would have dreamed of saying, as an economist did a week ago:
“Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans. This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.”
It would have been only a little more likely to hear a candidate say, as another economist said after the fiscal deal was reached, “We need a tax system that can promote economic growth and raise the revenue the American people want to devote to government.”
The first quote came from a column in The New York Times by N. Gregory Mankiw, a Harvard economist. The second statement was made W. Glenn Hubbard, the dean of the Columbia University business school, who was chairman of the president’s Council of Economic Advisers when the Bush tax cuts were enacted. He went on to say, a Times article reported, that some Bush-era policies were no longer relevant to the task of tailoring a tax code to a properly sized government.
Mr. Mankiw and Mr. Hubbard were among the top economic advisers to Mr. Romney. If they advised him to make similar statements during the campaign, he did not take the advice.
“Fiscal negotiations might become a bit easier if everyone started by agreeing that the policies we choose must be constrained by the laws of arithmetic,” Mr. Mankiw added.
Floyd Norris comments on finance and the economy at nytimes.com/economix.
Article source: http://www.nytimes.com/2013/01/04/business/lessons-from-european-brinkmanship.html?partner=rss&emc=rss
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