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Business Title: Six questions for Bruce Bartlett IT'S difficult to classify Bruce Bartlett politically. He has worked on the staffs of Congressmen Ron Paul and Jack Kemp and Senator Roger Jepsen. He was senior policy analyst in the Reagan White House; and deputy assistant secretary for economic policy at the Treasury Department during the first Bush administration. But he has also written a book titled, "Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy". So you could say that Mr Bartlett's loyalties are economic, not partisan. Currently Mr Bartlett is a columnist for the Fiscal Times, an online newspaper covering the economy, and he blogs at Capital Gains and Games. He has also written several books, the latest of which is "The New American Economy: The Failure of Reaganomics and a New Way Forward". We recently asked him some questions about the economy, the deficit, and the chance that America will one day have a VAT. DiA: Which should be a higher priority for the federal government at the moment, deficit reduction or economic stimulus? Mr Bartlett: Clearly, economic stimulus. The question is, what can the government do that would, in fact, be stimulative. One argument, popular in Europe, is that fiscal consolidation is stimulative by reducing uncertainty, the fear of future tax increases and inflationary expectations. While I concede that fiscal consolidation can be stimulative under certain circumstances, those circumstances don’t exist in the US today. Basically, we would need a situation in which inflation and/or tight money is the basic problem. Under those conditions, fiscal tightening can lower inflationary expectations, reduce crowding out and give the central bank room to ease monetary policy, thus leading to economic expansion. However, none of those conditions exist today. The Fed is as easy as it can be given the zero bound for interest rates, deflation rather than inflation is the central economic problem, and there is no evidence that federal borrowing is crowding private borrowers out of the market. There is no need to borrow to finance productive capacity at this time and, in fact, businesses have more than adequate cash on hand to pay for expansion if there were expectations of higher sales to justify it. Under these circumstances, I think we need some policy that will encourage spending, private borrowing and investment. Since further fiscal stimulus is effectively off the table for political reasons, some other mechanism will have to bring that about. The Federal Reserve is the only institution that can do it; the question is how. There may be scope for quantitative easing, but simply driving longer-term interest rates down further may not be effective given expectations of slow growth and downward pressure on prices. If the Fed could create inflationary expectations, that would help, but it may not have the capacity or credibility to follow through. My fear is that the US may be in for an extended period of Japan-style stagnation. DiA: In the longer term, what types of economic and political problems will we be looking at if we allow the deficit to continue growing? Mr Bartlett: In the near term, the biggest problem the deficit presents is that there is no further scope for fiscal stimulus. We now know that the Obama administration’s economists wanted a stimulus package last year almost twice the size of the one that was enacted—something closer to $1.4 trillion rather than $800 billion. Maybe that would have been enough; we’ll never know. Unfortunately, there was only one bite at the apple and doing more at this point is practically impossible. But what happens if we have a double-dip next year? Is it realistic to think that any stimulus at all is possible on the fiscal side? Given the likelihood of Republican gains in the November elections and the strong Republican incentive to make the economy as bad as possible going into 2012, I don’t think it would even be possible to pass a stimulus package that was 100% composed of tax cuts—the only stimulus Republicans might support. I would add that I do disagree with the Republican fixation on taxation. Federal taxes as a share of GDP are at their lowest level in two or more generations—14.9% versus a postwar average of 18.2%. There is not one iota of evidence that the economy is suffering from excessive taxation and no evidence that the sorts of tax cuts favoured by Republicans—mainly tax cuts for the wealthy—would do any good given the nature of the economy’s problems. Tax cuts don’t help those with no incomes because they are unemployed, businesses running at a loss, or investors with a large stock of capital losses. In my view, the Republican obsession with taxes is based on pure dogma, not analysis. DiA: More generally, which party do you find more credible when discussing America's fiscal challenges? Mr Bartlett: The Republicans don’t have any credibility whatsoever. They squandered whatever they had when they enacted a massive UNFUNDED expansion of Medicare in 2003. Yet they had the nerve to complain about Obama’s health plan, WHICH WAS FULLY PAID FOR according to the Congressional Budget Office. The word “chutzpah” is insufficient to describe how utterly indefensible the Republican position is, intellectually. Furthermore, Republicans have a completely indefensible position on taxes. In their view, deficits cannot arise from tax cuts. No matter how much taxes are cut, no matter how low revenues go as a share of GDP, tax cuts are never a cause of deficits; they result ONLY AND EXCLUSIVELY from spending—and never from spending put in place by Republicans, such as Medicare Part D, TARP, two unfunded wars, bridges to nowhere, etc—but ONLY from Democratic efforts to stimulate growth, help the unemployed, provide health insurance for those without it, etc. The monumental hypocrisy of the Republican Party is something amazing to behold. And their dimwitted accomplices in the tea-party movement are not much better. They know that Republicans, far more than Democrats, are responsible for our fiscal mess, but they won’t say so. And they adamantly refuse to put on the table any meaningful programme that would actually reduce spending. Judging by polls, most of them seem to think that all we have to do is cut foreign aid, which represents well less than 1% of the budget. Consequently, I have far more hope that Democrats will do what has do be done. The Democratic Party is now the “adult” party in American politics, willing to do what has to be done for the good of the country. The same cannot be said of Republicans, who seem unwilling to do anything that would interfere with their ambition to retake power so that they can reward their lobbyist friends with more give-aways from the public purse. Unfortunately, I don’t think Democrats have the guts or the stamina to put forward a meaningful deficit-reduction programme because they know—as I do—that it will require higher revenues. But facing big losses in the elections this fall I can’t blame them. That leaves us facing political gridlock between the sensible but cowardly party and the greedy, sociopathic party. Not a pleasant choice for those of us in the sensible, lets-do-what-we-have-to-do-for-the-good-of-the-country independent centre. 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#1. To: Skip Intro (#0)
Well said.
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