Wednesday, October 24, 2007

The Extinct Fiscal Conservative

I've always been naturally apprehensive when it comes to debt. I like the simplicity of a one-time payment and I hate the idea of interest expenses. However, I learned in business school that debt is actually a good thing if used in certain situations.

For example, a government incurring debt to build a highway is positive because that road will result in sustained economic growth that will, over time, largely offset or even completely pay for the original cost (and then some). Furthermore, paying for the highway over time ensures that all the beneficiaries of it (today and in the future) share a portion of the costs. It's a good idea from both an economic and a moral standpoint.

A bad example of debt would be using your credit card to buy your meals everyday. You incur interest expenses on the food which makes it more expensive. Furthermore, once you eat it, it is gone forever. You do not get any ongoing benefit from it. Plus, if you are like me, you exercise less restraint when spending money you never actually see (or have). This can result in you spending more than you need or should. Clearly this is a bad financial idea. And if you spend with extreme frivolousness, such that you leave your children with part (or all) of the bill for something they can never use, it becomes a bad moral decision as well.

This is precisely what our current government is doing today.

I read a story today that estimates the cost of the wars in Afghanistan and Iraq to be 2.4 trillion dollars over the next 10 years. This is in addition to the total we have already spent - a number far exceeding half a trillion dollars. (All of this, by the way is on top of our annual $500+ billion military budget).

I want to set aside any argument about the value of these expenditures. Whether or not you favor more or less money for these wars, let me call your attention to the fact that no American citizen has paid a penny for either of them since we invaded Afghanistan in 2001 or Iraq in 2003.

Our government has made the decision to let my generation and my children's pay for the entire war. The only sacrifices being made today are in blood and tears by a small portion of our population - those serving in the military.

Following the 9/11 attacks, the Republican House Majority Leader, Tom DeLay said the following: "Nothing is more important in the face of war, than cutting taxes". The Bush Administration and the Republican-controlled Congress agreed and did so.

This Republican policy is quite bold given that it directly contradicts the actions of the very first Republican president, Abraham Lincoln. President Lincoln instituted the first federal income tax in order to finance the Civil War. Another Republican President, William McKinley, levied taxes to pay for his generation's share of the Spanish-American War. Woodrow Wilson and Franklin Roosevelt each raised taxes to offset some of the expenses of World War I and II, respectively.

One could intelligently argue that financial prudence does not necessarily demand raising taxes during war. We could instead cut spending. That is a respectable argument in theory, but it would be tremendously difficult to sufficiently accomplish in practice. Furthermore, if not done properly, cuts could result in immediate decreases in social welfare that could cost us in real dollars in the future. Still, I concede that it is possible that cutting spending is the right answer. It is almost certainly at least part of the answer.

But in any case, the important point is that the Congress made no attempt to control spending either once the wars started - quite the opposite. For example, in 2003, the government passed the largest increase in entitlement spending more than 30 years when it passed the Medicare Prescription Drug Plan (estimated cost $500+ billion).

There is a good argument that this prescription drug spending is analogous to putting food on your credit card (or more aptly, your children's credit card). I agree that we should provide our senior citizens health care, but we should pay for it in cash because, frankly, the economic returns from this are minimal. It would be a different story if we were investing in the health of children with decades of economic productivity ahead of them.

But let me get back to the core issue.

Given the wartime fiscal policy of dramatically raising (non-war related) spending and simultaneously lowering taxes, I must ask: What do George Bush and Tom DeLay know that Lincoln and FDR did not?

I think we all know the answer to that.

And let's not fail to recognize that the Democrats have failed to remedy this situation since taking control of the nation's purse (though some have tried). We desperately need the Democratic leadership in the Congress to demonstrate some basic financial sense and some political courage.

There is a job opening in Washington: for a fiscally conservative political party.


Unknown said...

What do George Bush and Tom DeLay know that Lincoln and FDR did not?

Don't forget Bill Clinton! Remind me again why you don't like him...?

(Also, I use a credit card to pay for just about everything that I buy...but I pay off my entire balance every month. My credit score goes up, I pay no interest, the credit card company makes no money off me, and they keep raising my credit limit to try to get me to slip. Everybody wins!)

Jared said...

Better to use beloved dead presidents to make a point in an argument. Bill Clinton, whether rightly or wrongly, still evokes a strong negative response from some people, regardless of the context of the comment or the underlying truth.

In short, invoking FDR and Lincoln is an effective tactic that would be diminished if I added Bill Clinton to the list (plus he didnt fight a full fledged war that required more revenue).

This isnt the Huffington Post or DailyKos here - I'm trying to influence people across the political spectrum :)

And I still like my credit card analogy! (I was really proud of myself for coming up with that) :(

Unknown said...

Oh, no, no, the credit card analogy is fine since (I assert anecdotally) the average person does exactly what you describe with his or her credit card.

I do see your point on the Clintonia and was mostly teasing you. I don't know if I would compare the magnitude of the current situation in Iraq with that of the Civil War or World War II, but I don't claim that you were comparing them, either. Besides, much of the President's need for "more revenue" is due to his incompetence in prosecuting the wars in Afghanistan and Iraq.

Megan said...

I read the following in an article at about the drooping dollar, and it reminded me of this post.

"In a blistering essay in the current Vanity Fair, Nobel laureate Joseph Stiglitz, a former World Bank economist, notes that Bush took a nation with a budget surplus upon assuming office and turned it into a global debtor, and he has underinvested in education and alternative energy. 'In breathtaking disregard for the most basic rules of fiscal propriety, the administration continued to cut taxes even as it undertook expensive new spending programs and embarked on a financially ruinous 'war of choice' in Iraq. A budget surplus of 2.4 percent of gross domestic product (GDP), which greeted Bush as he took office, turned into a deficit of 3.6 percent in the space of four years. The United States had not experienced a turnaround of this magnitude since the global crisis of World War II,' Stiglitz writes. 'Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle 'worst president' when it comes to stewardship of the American economy. The economic effects of Bush's presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America's being displaced from its position as the world's richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.'"