America’s Tea Party has a simple fiscal message: the United States is broke. This is factually incorrect – US government securities remain one of the safest investments in the world – but the claim serves the purpose of dramatizing the federal budget and creating a great deal of hysteria around America’s current debt levels. This then produces the fervent belief that government spending must be cut radically, and now.It is clear to me that the lunatics have taken control of the asylum. The US has a very bleak future ahead until the electorate rises up and undoes the mistake of 2010 and puts reasonable people into the legislature, people with an eye on pragmatism, compromise, and a healthy concern for a growing economy and full employment and a much reduced concern for padding the already overstuffed pockets of the ultra-rich.
There are legitimate fiscal issues that demand serious discussion, including how to control growth in health-care spending and how best to structure tax reform. But the Tea Party faction of the Republican Party cares more about small government than anything else: its members insist, above all, that federal tax revenue never be permitted to exceed 18% of GDP. Their historical antecedent is America’s anti-revenue Whiskey Rebellion in 1794, not the original anti-British, pro-representation Boston Tea Party in 1773.
Most importantly, their tactics have proven massively destructive of wealth in the US. Since the prolonged showdown over the budget began earlier this year, the stock market has lost about 20% of its value (roughly $10 trillion). In effect, the Tea Party is working hard to reduce publicly funded social benefits – including pensions and Medicare – even as its methods dramatically reduce the value of private wealth now and in the future.
Part of the Tea Party’s founding myth, of course, is that smaller government will lead to faster growth and greater prosperity for all.
By signing a pledge not to raise taxes, Tea Party representatives have credibly committed themselves not to acquiesce in any middle-of-the-road compromise. If they break this pledge, presumably they will face defeat in the next round of Republican Party primaries. So, while a budget deal would technically be easy to achieve, it looks politically impossible in the near term. Indeed, while Congress and the Republican Party have become less popular during 2011, support for the Tea Party has remained remarkably constant, at around 30% of the population. Its tactics thus appear politically sustainable, at least through the 2012 elections.
Perhaps the most damaging outcome of these tactics is to take countercyclical fiscal policy off the table completely. Regardless of what happens to the global economy in the weeks and months ahead, it is inconceivable that any kind of meaningful fiscal stimulus would get through the House of Representatives.
The irony of the Tea Party revolt, of course, is that it undermines the private sector more than it reins in “big government.” The S&P downgrade resulted in a “flight to quality,” meaning that investors bought US government debt – thus increasing its price and lowering the rate that the federal government pays to borrow.
It was the value of the stock market that fell sharply – which makes sense, given that counter-cyclical policy is now severely constrained. The government part of the credit system has been strengthened, relatively speaking, by developments over the past few months. It is the private sector – where investment and entrepreneurial activity are needed to generate growth and employment – that has taken a beating.
Unless and until America’s private sector recovers, investment and job creation will continue to stagnate. But today’s atmosphere of fear and aggressive budget tactics are combining to undermine private-sector confidence and spending power.
As Jonathan Swift put it in 1727, “Party is the madness of many, for the gain of the few.”
Saturday, August 13, 2011
The Madness of Fanaticism
Here is a bit from an article by Simon Johnson, former chief economist of the IMF, professor at MIT Sloan, and a senior fellow at the Peterson Institute for International Economics. This article was published by Project Syndicate. The article looks at the lies & truths behind the Tea Party Republicans. I've bolded the key bits: