In an interview with the staff of the New York Forum, Garett Jones of GMU observed the following:
NYF: Neither political party seemed happy with the debt-ceiling agreement. But is it fair to say that the Republicans won?
GJ: In the world of political campaigning, yes, obviously: $2 trillion in possible spending cuts, no tax hikes. “We kept taxes from going up”: that’s a GOP campaign consultant’s dream.
But to the GOP policy wonks, this was a loss. The policy people know that they could’ve had a $4 trillion package, with less than $1 trillion of that coming from [tax] increases; that’s the deal Speaker Boehner and the President almost sealed.
As Milton Friedman is alleged to have said, “To spend is to tax.” So every foregone spending cut means a future tax increase. That’s why this was a loss to small-government Republicans: a trillion dollars of foregone spending cuts means a government that consumes more of the national pie (a net waste to most Republicans, unless they’re talking about the military) and it means higher taxes in the future (with worse incentives to work and save).
But the modern GOP is all about preventing current tax increases, not future tax increases. As long as the GOP isn’t in charge the day the tax increase occurs, GOP voters won’t blame Republicans. That means we’ll just have to wait for Democrats to get elected so they can raise taxes to pay for all of the spending programs Republicans (and Democrats) voted for.
In short, to serious policy people, the trillion-plus in spending cuts left on the White House negotiating table is a win for the long-run policy goals of Democrats and a loss for the long-run policy goals of Republicans. [Emphasis added]
I imagine that many NRO readers will disagree with Jones, but I think he makes a reasonable point. My concern is that the binding constraints on the negotiating parties were weak, i.e., one could plausibly imagine that a commitment to revenue increases would prove harder than a commitment to spending cuts.
I do think, however, that Jones’s observation on the Republican emphasis on preventing current rather than future tax increases is on target. During the Bush years, it was often said that the 2001 and 2003 tax cuts represented redistribution from future taxpayers to current taxpayers.
One could argue that this is entirely appropriate, as future taxpayers are likely to be richer than current taxpayers. It is also true, however, that the demographic composition of our population is changing, and that we’ve seen a marked slowdown in educational attainment. The ratio of retirees to workers is shifting in an unfavorable direction. So yes, I think Jones is right to emphasize the importance of policies that keep taxes low over the long-run over policies that keep taxes low in the short-run, or rather when Republican officeholders can be held directly accountable.
Later in the interview, Jones emphasizes the importance of “improving the nation’s balance sheet”:
If voters and politicians started to see debt as having some bad side-effects — especially after the collapse of an asset bubble — then we might see a lot less support for government-guaranteed lending programs and more support for slightly higher inflation (so we can outgrow our debts). It might also lead to support for some programs I’m less supportive of, but which still might have big payoffs: Ken Rogoff’s plan to get rid of underwater mortgages by creating partial equity partnerships in homes, for example. In his plan, the homeowner and the bank would share both the upside and the downside of a home’s price fluctuation. People can sell their home when they get a good job offer in another town, and they still take care of the home even when the price falls 20%.
Improving the nation’s balance sheet, both in the public and private sectors, is central to fixing our financial predicament, because a healthy balance sheet creates a healthy income statement.
This strikes me as very sensible advice, but I am in the Ramesh Ponnuru camp on monetary policy, which I understand to be a minority view.