It seems that budget negotiations between the White House and Senate Republicans have broken down. This is part of the effort to avoid a government shutdown and then default. It’s kind of funny when you think about it. Why is the White House negotiating with Senate Republicans, when it is the Democrats who control the Senate? Oh, that’s right! Because Congress, the Senate in particular, is totally fucked up.
The problem in the negations is that the Republicans want to cut entitlement programs. The White House is fine with that, but they want corresponding tax increases in the form of reduced tax deductions. The Republicans will have none of it. Let us take a moment to think about how absurd this is. Our economy is in a bad state. So the Republican response: make it worse by cutting entitlements. The Democratic response: we will only make the economy worse if you agree to do even more damage by raising taxes!
The economics of this is very simple. Our economy is running below capacity. Businesses are not investing because there is not enough demand for their products. Think about it: why buy a new widget making machine if you already have more widget making machines than you need to keep up with the widgets that people are buying? As a result, there is a lot of money just sitting around. So lowering the amount of money that the government borrows is not going to increase the amount that businesses are borrowing. (Also note: businesses are currently sitting on huge piles of their own money.)
I don’t expect much from the Republicans. They don’t want to cut entitlements because they think it is good economic policy. They want to cut them because it takes money away from the poor and that is just what Republicans do. But I do expect something from the Democrats and this raising taxes obsession is madness. While it is true that taxing the wealthy will not have the deleterious effect that taking money away from the poor will, it is still bad for the economy right now. What’s more, it all seems so much like a game. When Obama got the Republicans to agree to a tax increase earlier this year, Democrats were triumphant. It wasn’t that it was good policy; it was simply that “Obama forced the Republicans!” Big deal.
From a political standpoint, this doesn’t make sense either. Let’s suppose that Obama got what he wanted: cuts to entitlements and raised taxes. The budget would pass through Congress with primarily Democratic votes. So in 2014, the Republicans would campaign on the fact that the Democrats cut Social Security and raised taxes. Brilliant guys!