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How Politics Caused Fiscal Disaster

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And how central banks threaten prosperity by printing money backed by nothing.

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My thesis today is that monetary rot underpins fiscal decay, but that's not to gainsay the complicity of Capitol Hill and the White House in the march to budgetary ruin -- particularly the complicity of the type of Republican Whiggery which emerged after the 2000 election.

The truth is, just as the Great East Asian Deflation called for monetary hardening, not ease, it also warranted a large increase in national savings -- including public sector surpluses. But by then there had been assembled in Karl Rove's political assault camp, a coalition of the neo-cons, the social-cons, the tax-cons and the just-cons. None of them gave two hoots about real fiscal discipline.

The neo-cons postured as big-time thinkers, articulating a lofty policy case for an American Imperium. But unlike real imperialists, the neo-cons had nothing to say about the crucial issue of war finance.

Indeed, since DOD couldn't seem to keep a pipeline open in the planet's second richest oil province, the neo-cons couldn't even fallback on the imperialist's traditional gambit of looting the colonies. Obviously, the real answer was a war tax -- especially since the war at issue was an elective. But that idea was anathema in Karl Rove's assault camp, so the neo-cons simply ignored the fiscal consequence of the multi-hundred billion annual drain on the treasury their policies entailed. War finance, it seems, was relegated to the GOP's all-purpose folklore -- the myth that lower taxes and more growth would cover any fiscal hole.

The tax cons, for their part, did not even think about fiscal policy; they issued Papal Edicts. Consequently, a kernel of truth -- the notion that lower marginal tax rates are economically beneficial -- became ensnared in a body of debatable doctrine, even outright claptrap.

Foremost among the latter is the alleged absence of a correlation between deficits and either interest rates or real growth. Fine. If that's the test, let's abolish taxes completely and put the Federal government on a regimen of 100% bond finance.

Likewise, the tax-cons have shamelessly misapplied evidence that a lower capital gains rate did generate higher revenue. True, these cuts sped the realization of gains already extant, but that has nothing to do with the revenue impact from lowering or raising rates on 95% of what we actually tax; that is, accrued payrolls and earned income.

Not technical quibbles, these points highlight the folly of elevating tax-cutting to the status of religious writ. Indeed, unwilling to cut spending by so much as a single veto in eight years, the Bush Administration needed to get revenue raising on the table as a matter of pure math. But the tax-cons, having totally befuddled what passes for GOP fiscal thinking, were able to drive the herd in just the opposite direction, slashing Federal revenues twice more during the Bush fiscal debauch. The profound financial danger, therefore, is that there's no longer in the United States a conservative fiscal opposition even worthy of the name.

Moreover, this fiscally perilous condition continues to be exacerbated by the tattered remnants of Karl Rove's political assault camp. The social-cons, relentless as ever in their bible-thumping and immigrant-bashing, help to elect real socialists, as often as not. And the just-cons continue to turn fiscal responsibility into a bad joke.
No positions in stocks mentioned.

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