by Ari Rutenberg
On Sunday afternoon I was watching Fareed Zakaria's fantastic show GPS, on CNN, and saw a brilliant conversation with three of the nations leading economists, two of whom are confirmed supply-siders and the other, Jeffrey Sachs, invented the "shock therapy" methodology that has been applied with varying degrees of success in many developing nations.
At one point Sachs lays down a huge dose of reality, which neither of the other guys could being themselves to contradict, their normal inclinations aside (one of the panelists, Sebastian Mallaby, is a pretty hard-core suppl-sider, but even he recognized when reality has come back to bite). Sachs says:
"We're going to have to come back to reality. We've been in fiscal
unreality even before the crisis. Now the crisis is going to make all
of this more dramatic...Rich people are going to have to pay taxes again. That's just going to be part of America once again...We're not going to let our roads, bridges, infrastructure collapse.
We're not going to let our energy grid collapse. We're not going to let
our schools and health care completely collapse. We're going to have to pay for those things. That's the difference."
And the ensuing discussion illuminates precisely why the next President, whoever he is, will have to raise taxes.
Here are the three main reasons why the next President has no choice but to raise taxes:
1) We need to get our fiscal house in order. Originally, conservatives wanted to balance the budget and return as much money to the hands of the American people as they could...without compromising the solvency of our government. This has now morphed into an ideology of "we must always cut taxes, no matter what" which has, as Sachs says, now "broken the back of our economy." The government simply has to be able to pay for all the services that the citizens demand. In addition, we have to be able to pay for the basic infrastructure that has been neglected for 30 years. In order to be competitive we must have good schools, roads, and energy infrastructure. We cannot allow ourselves to become a third-world country to satisfy ideological desires.
2) We must avoid default. Standard and Poor's (which rates various types of bond in terms of their reliability) has said that U.S. Treasuries will be downgraded to class BBB (one grade above junk bond status) by 2020 if we are not more fiscally responsible. To allow the the world's strongest securitized investment to fail would be catastrophic for our government's ability to function. Not to mention rendering worthless many people's life savings, and our currency. This cannot be allowed simply to placate some ideologues who 'believe' tax cuts are always the answer.
3) We must maintain control over our own foreign policy. Currently much of our outstanding national debt is held by nations with whom we often have strained diplomatic relations. Countries like Russia, China, and Saudi Arabia. If we want to continue to pursue the foreign policy of our choice, we cannot allow ourselves to fall farther into debt with these nations. We already pay $460 billion a year in interest alone on our debt, which essentially means each year we borrow the full amount of interest from the very people we are paying. As we have seen in the current crisis, unlimited debt does not work. Eventually people must get paid. One example from GPS: If we want to support Taiwan in a military conflict with China, they could simply flood the world market with U.S. Treasuries, thus rendering our currency worthless and essentially forcing us to back down. And while I'm certainly not for a militant foreign policy, we cannot be constrained in our foreign policy because of bad debt resulting from a simple failure to raise taxes at the appropriate time.
No candidate will say this because they want to win. However I hope that both Obama and McCain are listening to those who really do understand this crisis and realize that for out future, our financial security, and our physical security, we must raise taxes and start having a normal government and normal capital markets once again.