In effect, each party stuck to the portion of itsprinciples that will be popular with the electorate right now --and dismissed the part that would be unpopular. The Washingtoncompromise is symptomatic of the disease infecting government atmany levels. It is known as short-termism.
The better course would have been the simplest one: Let theBush tax cuts -- on every income group -- expire. Democrats (Iam one) have generally supported raising tax rates only on therich. I never liked that approach because it's an attempt tocurry favor with the majority of the public by saying, "Thedeficit is not your problem; it's only the problem of wealthypeople." It sends a misleading, as well as divisive, messagethat, for the majority of Americans, incremental governmentservices, such as stimulus spending or rising health-careexpenditures, are free.
No Free Lunch
To make serious inroads on the deficit, we should restore Clinton-era tax rates on every income group. The wealthy wouldsuffer by far the largest incremental burden -- which is proper-- but the middle class wouldn't get a free lunch. TheRepublican Party has opposed restoring the old rates because, asit has repeatedly demonstrated, it is allergic to all taxes.Since it isn't opposed to government spending, only to revenue,it is hypocritical and exceptionally short-term focused.
Republicans claim that higher taxes translate to lowergrowth. Recent evidence is to the contrary. In the 1990s, thetop tax rate was 39.6 percent. The U.S. enjoyed a boomingeconomy, warmed by the balmy breezes of a balanced budget. Inthe 2000s, George W. Bush cut the top rate to 35 percent.Deficits ballooned, and the economy was mostly lousy.
Going back further, the connection is murky at best. In the1960s, marginal tax rates were extremely high -- 70 percent andin some years even more. The economy roared. In the 1970s, taxesremained high and the economy slumped. In the 1980s, President Ronald Reagan slashed taxes: By 1988, the marginal rate was only28 percent and the tax code was greatly simplified. Clearly,those giant tax cuts, plus the elimination of many loopholes,stimulated a boom.
Runaway Deficits
Though that decade-by-decade synopsis inevitablysimplifies, the evidence suggests tax rates should be as low aspossible subject to the constraint that the budget IS roughly inbalance in good times, and even in bad times avoids the risk ofrunaway deficits. But with the government borrowing equal to 9percent of gross domestic product, and with large entitlement-spending increases looming, we are well into runaway territoryalready.
The evidence also shows that small changes in tax ratesdon't depress the economy, especially when the outlook for taxrates is consistent and when tax policy is straightforward.
Current policy fails on inconsistency grounds -- given thedeficit, tax rates are unsustainable. The most serious quarrelwith raising rates now is that we are still emerging from arecession. But this isn't Herbert Hooverism -- the U.S. economyhas grown in every quarter since mid-2009.
Presidential Courage
It is true that, given the weakness of the recovery, thetiming isn't ideal. However, Congress has been passing off thebad coin of the Bush tax cuts for almost a decade. Why should wethink that Congress or President Barack Obama will show morecourage in 2012 -- a presidential election year?
For obvious humanitarian reasons, I support the extensionof unemployment benefits. Obama could have proposed anadditional extension in return for the lower estate-tax levelsso hotly pursued by Republicans. Unlike cutting taxes on peoplewith jobs, extending benefits to those without jobs is trulypart of the safety net -- one that, if properly explained, theelectorate would get.
Finally, lowering the payroll tax, which will drain fundsfrom Social Security, is incredibly shortsighted. It is onlyweeks since Obama's panel on the deficit highlighted the need tostrengthen entitlement budgets.
Punishment for Savers
I suspect the Federal Reserve has contracted the samedisease -- pushing ultra-low short-term interest rates. Thisencourages consumer spending and the credit-card mentality ofthe pre-crash years, and it punishes people who save.
The Fed is responding to today's sluggish economy, thoughthe signs for tomorrow are bullish. Rising long-term interestrates suggest that if the Fed had a little patience, therecovery would continue without further easing.
Another example of short-term thinking is the maintenanceof the government's role in propping up mortgages -- chieflythrough the failed Fannie Mae and Freddie Mac. Wouldn't it bemore prudent to let home prices fall to whatever level themarket would support? Then, private mortgage financing wouldreturn, leading to a sustainable housing recovery based on real-market prices.
Short-termism is also alarming at the level of stategovernments, which are facing massive budget shortfalls even asthey refuse to adequately fund their pension plans. It isn'tinconceivable that the federal government will be faced withanother too-big-to-fail entitlement -- that of a bankrupt localgovernment.
With the private sector recovering, albeit slowly, andpublic finances worsening, the time to restore our publicfinances to health is now. And if doing so delays the economy'sreturn to full and robust growth, then let the recovery comemore slowly -- and let it be built on sound financing and not ona new pyramid of debt.
( Roger Lowenstein , author of "The End of Wall Street," isa Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column:Roger Lowenstein at elrogl@hotmail.com
To contact the editor responsible for this column:James Greiff at jgreiff@bloomberg.net
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