Short Term vs. Long Term Options

I’m a little annoyed with myself. I wrote a post a month ago about how I thought Paul Ryan could win this year’s election if he ran as an independent (“Prediction: The Next U.S. President will be the Third-Place Finisher from the General Election”). While I wrote that post as an curiosity, I realize now that I actually want this to happen. It is not that I think a conservative president with a conservative House of Representatives and potentially supermajority Republican senate after 2018 would be good for the country. I actually believe the opposite.

I feel that conservative fiscal policies are misguided. The conservative tax strategy is to cut taxes on businesses and the wealthy to stimulate the economy. Most tax plans also cut credits and that would result in a tax increase on lower income taxpayers. Economic research shows that tax cuts on the top 10% earners do not stimulate the economy over the following two years, while tax increases on the bottom 50% earners cause a significant drag on the economy. Additionally, the likely social safety net cuts under such a government would affect the poor and cause a further drag on the economy.

I believe the economic policies enacted by a conservative president with a conservative Congress would lead to an economic slowdown and a ballooning budget deficit. The growth in the deficit would be dampened for the first few years because there would be a one-time business tax reduction on the trillions of dollars of foreign income earned by U.S. companies and not yet “repatriated.” Assuming a one-time 15% “repatriating tax,” the federal government would receive about $325 billion in business tax income on those monies.

So what would happen? President Ryan would take office in January and the tax policies would be enacted as soon as July 2017. By early 2018, the social safety net cuts – including the repeal of the Affordable Care Act (Obamacare) – would go into effect and the drag on the economy would begin. Tax revenues will probably be lower because, even though business tax revenue would be higher from the repatriated earnings, individual income taxes account for a larger portion of federal tax revenues and the lower tax rates on the wealthy will greatly reduce their tax burden.

The U.S. economy would probably fall into recession sometime between mid-2018 and mid-2019, and the business taxes paid on repatriated earnings would begin to drop off around the same time. The deficit would balloon and the conservative government would be loath to enact any kind of stimulus spending program. This would likely be a deep recession from which recovery would be slow and difficult.

So, why do I want a president Paul Ryan In January 2017?

Remember that I’m annoyed at myself about this, but after some self-evaluation, there appear to be two reasons. 1) There’s a curiosity factor – the same kind of thing that gets someone excited about gossip in the workplace, and 2) To finally solve the debate: what is the best economic policy?

It would be an interesting experiment. All those tax and spending cuts would be enacted with the promise of returning to a strong economy similar to the post war years. The previous administration gets the blame if things don’t improve quickly enough. After nearly a year, the repeal of the Obamacare would become a burden on low and middle income families. Hospital earnings would be reasonably good, but personal bankruptcies and foreclosures would increase. Sole proprietor business owners will likely use the top tax bracket rate cuts to modernize operations and replace jobs with automation

Conservatives will need a new target if the recovery fails to meet expectations after a year. I don’t know who they will attack, but it will be interesting to see how things develop. I assume they won’t blame business owners for the lost jobs, so it will probably be a renewed attack on regulation.

End the Debate
What’s best? 1) Cut taxes on businesses and the wealthy to stimulate the economy and cut spending to moderate the deficit, or 2) Use taxes and government spending (“transfer payments”) to reduce the gap between the rich and poor and have a more equitable society?

Proponents of the tax & spending reduction option state that high taxes on the wealthy and too generous a social safety net for the poor both reduce incentive to work. It’s the “pull yourself up by your bootstraps” philosophy, and that those with more marketable skills should earn whatever the market will support. Taken to the extreme, this is a system which provides for a national defense, but little else – no Medicare, Social Security, postal service, medical research funding, NASA, minimum wage or environmental protection.

The proponents of generous transfer payments believe it is a matter of fairness and that government has a responsibility to ensure that its citizens are protected from famine, homelessness, denial of medical care and other ills.

Taken to the extremes, option one is a survival of the fittest strategy and option two is communism. Somewhere between the two extremes is probably the best economic policy, but if one extreme is enacted into law, we would find out what happens under those conditions. If the country thrives following the tax and spending cuts, we have our answer. The conservative plan is the best.

If, however, the deficit rises dramatically, bankruptcy of low and middle class families increase, and the country falls into a deep recession, we’ll know that the conservative tax and spending plans are not the panacea promised. It does not prove that large transfer payments are the best policy, just that tax & spending cuts are not.

Short and Long Term Options
I am annoyed with myself because I’m thinking of this as a game. Some Americans are well suited to weather whatever storm comes from enacting such a policy, and may even come out of a long hard recession in a stronger financial state. For others, however, the consequences would be devastating. There are many more people in the latter group.

This is not an experiment – it is real life. The popularity of Donald Trump and Bernie Sanders shows how dire the situation is for so many. They would not be able to survive a bad recession – a large number are still suffering from the last one. We would find the highest homelessness rates since the Great Depression, and the conservative solution would be to encourage churches to provide help.

No more playing around. It’s time we all show concern for everyone in this country and work together to ensure steady economic and job growth. We don’t want a bubble – they burst and cause pain. We want nice, steady growth, and a calming down of the rhetoric. It’s too bad U.S. Presidential election campaigns last about 3-1/2 years now.

About tonyj126

I'm a 50+ married man who always seems to have a large backlog of work to do, but also a lot of flexibility in my schedule. Much of the work I do is volunteer or taking care of extended family members. I suffer from, as my priest calls it, "the sin of self-sufficiency," which means I can figure out how to do most things myself, and consequently, reduce the need for community to solve problems. As a logical extention (at least to me), I find myself called to comtemplate the country's and the world's woes and offer my observations. I hope someone out there will find them useful.
This entry was posted in Economics, U.S. Politics, Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s