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Our Debt Crisis Matters

On the surface, it seems valid for conservatives to be concerned primarily with lowering taxes. After all, less taxation means that people are able to keep more of what they earn – incentivizing new wealth production, job creation, etc. Of course, it’s ideal for tax cuts to be implemented in conjunction with equal cuts in spending; a point most conservatives (at least those outside the beltway) agree on in theory. However, the focus always seems to be more on taxes than spending. Sometimes, especially within the soundbite culture of politics, it’s hard to tell if people are even distinguishing between the two extremely different matters – which is highly problematic in and of itself, because we really don’t actually PAY for much of what we get from our government as a nation.

I will always agree that it’s wrong to raise taxes during a recession. There’s no doubt in my mind that doing so will cause a great deal of suffering, and eventually lead to overall less wealth for the government to tax – sending us down the inevitable path to collapse that socialist policy necessarily leads to. However, unlike many fellow right-wingers, even including good libertarian friends of mine, I can’t get behind a compromise to extend current tax rates when the proposal contains new spending. While I wholeheartedly support the extension of current tax rates as a stand alone issue, at this point in time with a serious debt crisis looming, said extensions need to be, at the very least, deficit neutral. (And deficit neutral they would be if voted on alone).

On the politics of this matter, I agree with Ken Taylor at Red State in his analysis of the current tax rate deal, and what the GOP must do when new elects are sworn in:

(The GOP must) back away from (this) deal using earmarks as a legitimate deal busting reason, and state loudly that they will ONLY accept an up or down vote for JUST the extension of ALL rates and nothing else in the deal package. Democrats will balk at this, and the bill will die a quick death as the lame duck session runs out of time to deal with it in 2010. Once the GOP takes control, extend the rates permanently retroactive to January 1st, forcing Obama to either accept a permanent tax rate or VETO; allowing the largest tax hike in history, which will be his sole responsibility. A two year extension does nothing but make this a campaign issue in 2012, when Obama can claim he compromised, and the “tax cuts,” didn’t stimulate the economy, which they can’t because they change nothing – and claim Republicans sacrificed the middle class for the sake of the rich. Next, the GOP can create legislation that make rates even lower, combining this with real and drastic spending cuts that will reduce the size of government while stimulating the economy – as even lower rates will increase consumer spending and confidence while reducing the deficit; which too will stimulate the economy. Of course this is only a beginning but it will shut the left up as the economy improves due to REAL tax and spending cuts – and Obama and his cronies will not have a created issue that can be used to demonize “the rich” and the GOP in 2012.

Mr. Taylor makes his case well. I think he’s correct to say Democrats are tricking Republicans with this one, and that really, there’s no practical reason not to wait until the new elects are sworn in to deal with this issue in a manner that’s productive rather than damaging.

To add another dimension to the point, I firmly believe that when where we’re experiencing relative economic growth and have a manageable national debt, it’s comprehensible, even if I disagree as a deficit hawk, that conservatives might support trading an increase in spending for a deal that prevents taxes from going up. It’s a well taken point within the context of understanding that less taxation spurs economic growth, and therefore, aggregate availability of revenue to pay down the debt in the future. However, our national debt is currently at a record $13,848,017,156,749.09 – a truly incomprehensible number that realistically, can NEVER be paid back.  In fact, earlier this week:

Moody’s warned that it could move a step closer to cutting the U.S. Aaa rating if President Obama’s tax and unemployment benefit package becomes law. The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said. A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months. For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments.

Clearly, the sobering truth of the situation we’re facing cannot be described honestly without utilizing the word crisis. And in Europe, where countries are just a bit further down the rabbit hole than we are, the situation has been referred to widely in such terms. Very real debt crises continue to plague European nations. The first to fall in a major way was Greece, when the country was bailed out in April of this year amidst violent protests to necessary tax increases foisted upon them in conjunction with spending cuts. Portugal and Spain are in similar economic positions, with Great Britain and others not far behind. Most recently, Ireland had its banks bailed out to “stabilize” the economy (IE: a European version of TARP on steroids). In light of this, we must pose a serious question: At what point does the bailout money (which is a product of private sector wealth creation – a phenomenon discouraged by “progressive” taxation) simply run out?

In the U.S., we have the Federal Reserve in crisis mode, diligently (ahem …) working to make sure that we don’t, in fact, “run out of money” – which is easy to do when you’re allowed legal counterfeiting privileges. Ok, sure, so we won’t run out of physical dollar bills – but let’s look at the wider implications of this behavior, and analyze it within the context of supporting more spending as a means to avoid tax increases – which is exactly what many conservatives, are advocating right now; despite both the political and economic shortsightedness of doing so.

Hopefully at this point, you’re familiar with the Fed’s “Quantitative Easing II” project, which, not so conincidentally, was rolled out the day after this year’s election – so naturally, it didn’t get the media coverage such a massive undertaking deserves. Clearly, given its moniker, the point is to make one assume that it’s a corollary to an earlier (failed) attempt at stabilizing the economy with “Quantitative Easing I”. My friend Arkady at Right Condition summarizes QE1 (and why it failed) perfectly:

“During QE1, Bernanke bailed out the banks by buying mortgage paper that nobody else wanted to purchase. He bought all this paper at unknown prices and saved the banks by providing them a mechanism to stay afloat without addressing the trillions in their bad purchases. They of course turned around and padded their pockets with it, bought commodities and created asset bubbles in the stock market. However QE1 was supposed to be more than just a life line for banks; it was also supposed to be a catalyst for inflation. Banks were supposed to generate loans and flood the economy with liquidity. They did not. They refused to and rightfully so. Because this is not 1987, or 1992 or even 2000. Economic activity is so dead that nobody is interested in lending and thus, Bernanke failed.”

Given that artificially lowering interest rates to zero and QE1, among other tinkering, didn’t spur growth or restart our lagging economy, Bernanke figured that more intervention was the next logical step, and despite prior promises, has moved toward the dangerous policy of debt monetization.

Per Congressman Jeb Hensarling in March of this year:

Without spending discipline, only one option is left — monetizing the debt, also known as inflation. Although Chairman Bernanke has repeatedly said that will not happen on his watch, many think it inevitable.

Sadly, when QE2 was announced on November 3rd of this year, only one member of the Fed’s Board of Governors had the foresight to vote against the measure – and for the right reasons:

“Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation (emphasis added) increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”

Anyone want to help translate from FedSpeak to English, “high level of monetary accommodation“? If you guessed inevitable debt monetization to sustain our addiction to deficit spending, IE, deliberate inflation, IE, steep increases in basic commodity prices and a devaluation of your savings, you’re correct. This is the point a complete and utter lack of fiscal discipline has brought us to – and it’s why at this point in our nation’s history, I can’t support any measure that add one cent to the deficit – because it’ll come back to haunt us in a much, much bigger way later.

My overall point in tying the debt monetization discussion into the debate over this tax deal is to suggest that my fellow conservatives consider the issue within a big picture context. While conventional wisdom might suggest that deficit spending is permissible within reason because tax cuts lead to economic growth and in turn more revenue, we’re living in rather extraordinary times, and I don’t think that reasoning applies right now. When Republican politicians have defended tax cuts without relative decreases in spending (which I’m not excusing, by the way), we weren’t facing an unprecedented debt crisis, nor was the Federal Reserve knee deep in fully implementing the kind of backhanded policies we’re seeing Bernanke undertake now.

What does an extension of current tax rates really do for anyone when our savings are being devalued through an inflation tax levied on us by an unelected “Board of Governors” in a last ditch effort to sustain our spending? Letting the current tax rates expire if Democrats aren’t willing to have an up or down vote on the issue alone is vastly preferable to continuing the policies that make the Federal Reserve resort to actions that have the very real potential of making Carter era inflation look like a joke. And please – keep in mind that Republicans, many of whom were backed by tea party activists, have the House. Let’s deal with tax rates on our own terms when the new elects are sworn in. It really believe that it’s politically untenable for President Obama to veto a tax rate extension given his current rhetoric – so why are we playing into his hands now? He knows the current tax rates need to be extended. He doesn’t want to shoulder the blame for increasing taxes during a recession, and Republicans are giving into his demands when they actually have the upper hand.

If newly elected conservatives don’t take serious action regarding spending cuts, debt monetization will continue – making this tax deal debacle look like a joke – especially because the legislation on the table now only extends the rates for two years – rendering the claim about creating stability for businesses moot. Take a cue from guys like Congressman Jason Chaffetz and Senator Jim DeMint, and recognize that our debt crisis is a far greater threat to our nation than something that’s really, nothing more than a temporary tax increase, which can be dealt with retroactively, and on its face, pales in comparison to the economic dangers inherent in debt monetization; a policy the tax deal perpetuates by adding significantly to the deficit.