Conservatism and me; part four: Economics

Even more troubling that the modern conservative shift in foreign and military policy is its even more dramatic shit in economics. As conservatives became Wilsonian (or liberal) in foreign affairs, they have gone right off of the edge of reason when it comes to money. This is important in so far as when you cease to have money, you run the very real risk of not having a country at all.

Before I go further, I'll take a minute to explain what I believe because some of you might be new.

I don't like government and would like to limit its power against the individual as much as possible. The difference between me and modern movement conservatism is that I recognize that most people - including most "conservatives" - don't agree with me and probably never will. Modern conservatives, for example, are just as likely as liberals to use the tax code to influence and shape personal behaviour.

That being the case, I'm of the considered opinion that government needs to be paid for. The idea that you can "starve the beast" is silly. You might be able to do it, but you do great harm to your country and economy for the trouble. Other than rhetorically, there is no absolutely no consensus on the need for small government. People might say that they like the idea of limited government, but when you ask them about particular programs to be cut, they very quickly get outraged.

More importantly, I'm not even sure that democracy is amenable to the idea of limited government in the first place. As the electorate becomes less and less informed (and more politically polarized), politicians are finding that it's easier to do the one thing that politicians have always done: bribe people with their own money.

Conservatives since Reagan have done this through the tax code, with the exception of George W. Bush and the Republican Congress of 2001-'06, who used both the tax code and more traditional spending to mollify the public and buy its political support. The Conservative Party of Canada under Stephen Harper did pretty much the same thing between 2006 and today.

First, the Tories passed the least efficient tax cut imaginable (on the consumption tax, which didn't increase purchasing power or stimulate the economy to any large degree, but cost a fortune in revenue) and stuffing the tax code with credits designed almost exclusively to buy votes. And then when the financial crisis hit, the Tories engaged in a stimulus program at least as large as Barack Obama's in the United States. When Grover Norquist tells you otherwise, Grover Norquist is lying.

This results in massive deficits and debt. The truth is that every time in American history that large tax cuts have been passed, they have created deficits because spending has not only not gone down, it actually increased. The Kennedy-Johnson tax cuts were accompanied by the Great Society and the Vietnam War. The Reagan tax cuts were implemented alongside a dramatic defense build-up. And finally, the Bush 43 tax cuts were matched by two unfunded ground wars and an explosion of domestic discretionary spending.

I know, just as pre-1980 conservatives did, that tax cuts are spending by other means and must be paid for. When they aren't, you plant a time bomb in your own economy.

There is no end to the outrage over Obama's deficits from conservatives. What they won't admit - and for some crazy reason, Obama himself won't point out - that the single largest drivers of the deficit remain Bush's programs. Chief among those are the 2001 and '03 tax cuts, which have cost a staggering $3.7 trillion in lost revenue and debt service costs over the last decade. Then there are Medicare Part D, No Child Left Behind and the secondary costs of the Iraq and Afghan wars.

Obama has contributed to the deficit, but not as much and not in the ways that you'd expect. First, there was the 2009 $800 billion stimulus, slightly over a third of which was tax cuts. Then there's his ongoing payroll tax "holiday." And all of this was done over four years of chronic, high unemployment, which deprives the government of significant revenue and further grows deficits. Obama also expanded the Afghan War and increased defense spending.

Yes, Obama has spent his share on nonsense, but not as much as you probably think. That's not a defense of Obama, who I'm not especially fond of, but those are the facts and they seem to be in short supply these days.

Modern conservatives are married to Reagan's ideology. but seem to have forgotten the philosophical underpinnings of it. Reagan's tax policy was predicated on the Laffer Curve, which posited that if you cut taxes to a certain level, you stimulate the economy and maximize tax revenue, thereby minimizing the cost of the cuts. But even the Laffer Curve relies on some spending restraint, without which you blow a hole in the deficit.

Here's an interesting fact. I'm the first person in well over a decade to mention the Laffer Curve. God knows Republican politicians don't. Of course, things like the Laffer Curve are hard to explain in a thirty-second TV ad and it's always easier to go on an almost Maoist campaign of renaming things you don't like, which the GOP began doing in the mid-1990s.

They began with the rather innocuous estate tax, which almost no one paid but raised a ton of revenue. That became "the death tax", making it easy to cut to nothing during the Bush years. In the last year or so, Republicans don't recognize certain Americans as "wealthy", "well-off" or plain old "rich" anymore. These days they're "job creators", which has an awfully patriotic ring to it.

Unfortunately, it also fundamentally misrepresents how the economy works. The rich - pardon me - the job creators don't create jobs on their own, and they never have. To suggest that they do, whether out of some charitable impulse or simply because they're bored, is insane. Even Donald Trump only hires one person for every nine that he fires.

Here's a very basic lesson in how economics works, maybe the simplest you'll ever get. Jobs are created by consumer demand. That demand incentivizes industry to create supply, which in turn is where jobs come from. Absent consumer demand, jobs don't get created, irrespective of what the rich do.

Unemployment in the United States isn't what it is because Barack Obama took away all of Mitt Romney and Bank of America's money. It's because there is no consumer demand. People, it turns out, don't make extravagant purchases when they're afraid of losing their homes, which a good many Americans have been for five years now. Furthermore, banks are less than favorably inclined to make loans when they're afraid of being burned by another round of defaults.

This recession has nothing at all to do with personal income, corporate or capital gains tax rates. You could lower them all to zero and you still wouldn't move the needle on employment.  Unless and until the housing surplus is liquidated, there will be no demand for construction or durable goods manufacturing, which are the early drivers of economic recovery. Even then, people are going to be jittery about their massive household debt, which will inhibit growth even when the housing situation is corrected.

It will probably take at least a decade for the U.S economy to return where it was prior to 2007, assuming that it ever does. And I'm not making that assumption.

For a number of reasons that I don't want to get into here, the American economy enjoyed artificial growth for the last thirty years. Real household income began to stagnate in the mid-1970s, and Americans maintained their standard of living by using their houses as ATMs and going into credit card debt. That was manageable when interest rates were high, but when they came down for a sustained period in response to the bursting of the tech bubble and 9/11, borrowing went into hyperdrive until it was finally exhausted. While the financial services industry was bankrupting itself through unimaginably crazy derivatives trading, American consumers were bankrupting themselves the old-fashioned way. During that thirty-year period, the U.S manufacturing sector was sent overseas, further retarding middle-class growth.

As a consumer, how confident would you be under those circumstances?

At the best of times, the myth of "the job creator" is a nonsensical fantasy. In the situation the American economy currently finds itself in, it could be disastrous.

Let's say the GOP wins the presidency, holds the House and wins a filibuster-proof majority in the Senate (an extremely optimistic prediction of this election, I know.) They've said that they'll make the Bush tax cuts permanent and further lower rates, and I have no reason to doubt that they're crazy enough to do it.

The only trouble is their pledge to close loopholes and lower or eliminate deductions. Specifically, they won't do it.

First, no Republican will do anything nuts, like tell you which loopholes and reductions they plan on doing away with, which should tell you that won't touch any of the popular ones where the real money is. Those are the mortgage interest deduction, the deduction for state and local taxes, and the deduction for charitable and political contributions. Remember, these people are too scared of Iowa primary voters to do anything easy, like eliminate the ethanol subsidy. That being the case, what makes you think that they'll do anything hard?

Second, the lobbyists won't let them, even if they were brave enough to want to. You know how ObamaCare became such an ungodly mess? Because the Democrats so needed the insurance, hospital  and pharmaceutical industries on board to pass anything at all that they let the lobbyists write the bill. Serious tax reform is going to draw in every lobby known to man and probably a few that aren't.

Folks with a working knowledge of history will point to the Tax Reform Act of 1986. Unfortunately, that ignores that things have changed a great deal since then.

• Reagan, who had not yet been politically wounded by Iran-Contra, was still a highly popular president. There is no reason to believe that Mitt Romney will have those kind of approval ratings in a bad economy. That's especially true where tax cuts in a bad economy are concerned.
• Congress was still more popular than your neighborhood pedophile, which isn't true now.
• The lobbyists were only beaten (and they very nearly weren't) because tax reform had broad bi-partisan support, which no rational person thinks is possible in this atmosphere.
• Because of a sea-change in campaign finance law, lobbyists are more powerful than they were twenty-five years ago, not less.

On top of the likely failure of tax reform, no one is suggesting that any serious entitlement reform will take effect in less than fifteen years, and defense cuts are completely off the table. But they say that they will cut rates, which increases the deficit further. As soon as the international markets see that, I can't imagine that they won't further downgrade America's credit rating, driving interest rates up in a stagnant economy and killing consumer confidence.

If European bank failures don't send the economy into a depression, that will.

And I'm assuming a lot in making those predictions, specifically the Republican commitment to keeping taxes low for everybody.

Prior to 2009, Republicans were proud of the number of people that they took off of the federal tax rolls with the Reagan and Bush tax cuts. But like a lot of things in their orthodoxy, that's changed.

Pissy idiots like Erick Erickson, Michele Bachmann and Sarah Palin have responded to the equally nonsensical Occupy Wall Street movement by taking up the banner that they are the "the 53%" of Americans that pay federal taxes. Erickson and Bachmann both make well over $100 grand and Palin has managed to trade her half-term as governor of a state where no one lives into about $10 million, so I suppose we should give them all a cookie because we should feel terrible for them.

The 53% rhetoric begs an interesting question. Are these people just making a preening display of their moral superiority (or the fact that they're too dumb to properly shelter their substantial incomes, like Mitt Romney did), or are they seriously suggesting a regressive new tax structure?

This isn't the cheap political stunt that it appears to be on first blush. For twenty years now, Republicans have been proposing fairly significant tax increases on the poor, the working poor and the middle class. That's basically what a flat tax or the Fair Tax would do. Most economists believe for it to generate the revenue that the current code does, it would have to be around 27% and increase with the number of deductions, loopholes and other goodies that you put into it.

For example, if you deduct things like food, gasoline or heating fuel, the rate has to go higher. The same is true if you have rebates or "prebates" for low-income earners. Because the lower and middle classes spend a larger percentage of their income than do the wealthy, you effectively shift the burden of the tax code, or "spread the wealth around."

Nor are things like Social Security and Medicare, which are funded by a separate payroll tax, ever mentioned. Would the payroll tax disappear? If so, is the tax really "revenue neutral" given the unfunded liabilities of those programs? How does a revenue neutral tax balance the budget and pay down the debt. especially when taxes as a percentage of GDP are at their lowest point in nearly a century?

Another problem with a flat tax, as I mentioned earlier, is that cuts to consumption taxes generally don't stimulate economic growth. When Canada's Conservative government cut the Good and Services Tax by 2% in 2006-07, it didn't do anything other than cost billions of dollars and throw the budget out of balance. Well, it did get Harper elected, so I guess there's that. But economically, it was next to useless. By instituting a flat tax, you remove the only conservative means of economic stimulus during downturns.

Furthermore, increasing taxes on the lower and middle classes inhibits paying down personal debt, without which I don't see any growth occurring, regardless of what the government does with fiscal policy. Nor will flat taxes bring manufacturing jobs back to America because tax rates aren't the problem, overseas labor costs of less than a third of the U.S standard living wage are.

That doesn't mean that I don't support it. I haven't seen precise enough language on it to decide either way. I'm certainly not dismissing it out of hand because it's a lot more serious than the standard Republican boilerplate of "Tax cuts for everybody!" But it does mean that conservatives are lying when they say that they don't want to raise anybody's taxes because they do, and in a fairly big way.

The thing is that all of these plans are premised on revolutionary theories, which conservatism wasn't traditionally predicated on. At best, the outcome these plans are unknowable, at worst, they're wishful thinking. But they do not "promote retaining traditional institutions and support, at most, minimal and gradual change in society", which is what conservatism is still defined as doing.

As a matter of lingustics, revolutionary conservatism is an oxymoron. As an economic theory, it's potentially lethal.