Writing recently in The Financial Times, the renowned novelist Margaret Atwood nailed the lasting effects of the recent – and some would say continuing – global financial crisis. “Those at the top were irresponsible and greedy,” she wrote; consequently and with good reason, very few people now trust our banking elite or the system they operate. Even Cam Fine, president of Independent Community Bankers of America, is now calling for the country’s largest banks to be broken up.
But the distrust goes deeper and further, just as Ms. Atwood implies. Many people understand perfectly well that the government let the bankers take excessive risk. There was a high degree of group think among prominent officials in the United States and top banking executives in the run-up to the crisis of 2008. As chief economist at the International Monetary Fund from March 2007 through August 2008, I observed some of this first hand.
And politicians are also tarnished. They appointed the officials who failed to regulate effectively. And in 2007-8 the politicians decided to save the big banks – and most of their managers, boards of directors and shareholders – both under President George W. Bush and under President Obama. Now attention turns toward the federal government’s fiscal problems, including the complicated mess that is our tax system. Politicians say they want “tax reform,” but can you trust them to do this in a responsible manner, without falling captive to particular special interests or to otherwise undermine the general social interest?
The latest indications from Mitt Romney are not encouraging. Mr. Romney is proposing to implement a tax overhaul that he says would be revenue neutral. But his actual plans amount to cutting tax rates, particularly for high-income people, while not closing enough loopholes to make any difference (see this assessment by my colleague and co-author James Kwak, or this take by Matthew O’Brien of The Atlantic).
At the same time, President Obama is focused on increasing taxes for relatively well-off Americans. Mr. Obama wants to make the Bush-era tax cuts permanent for people earning less than $250,000, while not extending them for people with income above that level. What exactly will control the trajectory of deficits and debt in that scenario?
Perhaps we should trust our politicians to control future health-care spending, even though none of them can specify exactly how this should be done. But what is really likely to happen given that health-care providers – hospitals and doctors — are a powerful lobby, while insurance companies may be even stronger.
All significant loopholes, including the tax exemption of employer-provided health benefits and the tax deductibility of mortgage interest payments, will be defended fiercely by powerful special interests.
Top military officials seem willing to curtail spending, but members of Congress frequently resist base closings and the cancellation of weapons programs. President Eisenhower famously warned against the military-industrial complex; perhaps we should update that to acknowledge that it’s the industrial-political complex that’s the danger.
The financial crisis blew a giant hole in our budget and, with good reason, greatly undermined confidence in our political elite. Gridlock in Washington has reached a new peak – President Obama proposed the Buffett Rule, which would have raised a very small amount of additional revenue by creating a minimum tax rate of 30 percent on all income over $1 million, and the Republicans immediately blocked consideration of it in the Senate.
Most of what poses as “tax reform” in Washington today is actually tax reduction. With our public finances in their current state, this is the last thing we need. The idea that reducing taxes “pays for itself” through higher growth is just wishful thinking; in our new book, James Kwak and I debunk this in part by citing the research of Greg Mankiw, former chairman of the Council of Economic Advisers under George W. Bush and a key adviser to Mr. Romney. Yet Mr. Romney and Mr. Obama are likely to compete in November partly on the basis of their tax reduction proposals.
May we hope that there are ways to bring our national debt under control? Prospects are not so gloomy, for two reasons.
First, if true gridlock prevails, the Bush-era tax cuts will expire at the end of this year. Whatever happens in the November general election, the Democrats and the Republicans would need to agree in order for these tax cuts to be extended. It is quite possible that this will not happen.
That’s a big fiscal adjustment, to be sure. But it could well be buffered by a temporary payroll tax cut, linked to employment relative to population. As employment recovers, the payroll tax cut would fade away.
Second, one day soon the private sector will wake up to the fact that rising health-care costs are undermining the American economy, and making it much harder to earn a profit.
With money-driven politics, the only way to fight a lobby is with a bigger lobby. American businesses are typically reluctant to trespass into someone else’s sector. But they will do it when their own bottom line is at stake – as, for example, when they resist various forms of protectionism.
Health-care costs are not under control; we pay more for the same or less-good services over time; this is like the worst kind of taxation. In 20 years, the adverse impact of health-care costs of businesses will be much worse than any negative effects of taxes.
But don’t wait for the politicians to take this on. The problem is far too important and that route will take too long. Talk instead to private-sector executives and entrepreneurs. Persuade them that health-care costs need to be brought under control, and force them to think about how they can push the health-care industry in this direction.
Don’t leave banking regulation to be decided by the banks. And don’t let the health-care industry control the discussion on what needs to be changed in cost of the delivering medical services.
Cam Fine is now willing to take on the big banks – he should be commended and supported more broadly on this basis. By working on this issue at the highest political level, he can help restore grass roots confidence in community banking.
Who within the private sector is willing to take on the healthcare lobby? Who will take the lead on restoring trust in our market-based economy more broadly?
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.