Stripping Hyperbole Away From the Fiscal Debate

TW: Had a minor epiphany relative fiscal policy when reading this piece. If one strips the political hyperbole out of the equation, the debate is fairly simplistic. Toss away talk of fiscal prudence and conservatism, it is BS.

There is a consensus (except amongst certain Hooverite Republicans) amongst many Republicans and most Democrats that fiscal stimulus is necessary in order to mitigate the impact of the demand contraction. Certainly the Republicans favor tax cuts more than the stimulus spending favored by Democrats but neither side has sufficient theoretical standing to assert an all or nothing tax cut or spending approach. The opposing ideologues would push to go all one way or the other but the reality is a hybrid approach is likely the best approach.

In the long-run the U.S. needs to eventually bring its fiscal deficit back to balance no doubt. Timing is everything and the next two or three is not the time. But what happens afterward? Conservatives have a legitimate concern that government spending tends to be sticky once initiated. I would argue tax cuts are similarly sticky as evidenced by the shrieking emanating from conservatives as Obama seeks to restore the tax rates on the wealthy back to Clinton levels. And understand the Friedman philosophy about which many Republicans have an almost religious zeal states very clearly that in order to have the magical economic impacts attributed to tax cuts (e.g. Laffer curve drivel etc.) the tax cuts must be permanent in order to engender the proper incentives.

Putting stickiness aside, the baseline U.S. fiscal deficit is growing without any new spending on new wars, universal health care, green initiatives etc. So when I hear or see a politician pontificating on fiscal policy I would ask the following questions:

1) Do they believe some type of stimulus is needed? If not they are Hooverites, suspect either economic ignorance, political expediency or most likely both.
2) If they do support some stimulus, how do they propose to address the long-term fiscal challenges? Earmark reform does not count (i.e. stalks of grass amidst a meadow full of weeds). As I have said before, one either must increase taxes or cut spending in either social security, health care or defense. There is no way around these options unless one believes in the tooth fairy known as the Laffer curve whereby taxes are cut and magically more revenue appears. If the person is unwilling to define how they would address these options and you do not believe in tooth fairies then consider them BSers or merely a typical political flack.

How does Obama fair on these questions?
Re #1: He is clearing in the pro-stimulus camp using a hybrid, if you buy the need for stimulus all of this hyperventilation from these newly minted fiscal hawks (where were they prior to Obama's inauguration?) should be discounted.

Re#2: He has work to do but his restoration of the Clinton tax levels for the wealthy and the cap and trade policy would generate some revenue. He is making some baby steps on reforming the cost side of health care. He will spend less than a Republican would on defense (except massive hyperbole about throwing American security to the wolves/bears/dragons as soon as he announces some defense program cutbacks). He has yet to address social security. But given all of the fretting about him already biting more than he can chew I will be patient on the latter.