Elections Have Consequences…Not Necessarily Obvious Ones

It’s now a few days after the election of 2012 and I’m still searching for something to be optimistic about in the results.  As I suggested in recent posts, this was to be an opportunity for a choice about the nation we want to be, the emphasis we want to pursue.  Sadly, my view is that the choice we’ve actually made is probably the wrong one on the economic and fiscal policy fronts.  And, my home state of California has gone even further in a continuing wrong direction than at the federal level.

Mitt Romney is indeed a very good man, smart, compassionate, and very generous, worthy of respect and admiration.   I disagree with several aspects of his announced social agenda, but I would be much more optimistic about good economic results in the coming years with him in the White House.  I am convinced that we’ve got to get the economics right before we can effectively tackle whatever social agenda is appropriate for any government to pursue…and, for me, that’s not really very much.  I would feel much more comfortable having government, with its potential for the tyranny of the majority and its susceptibility to influence by very committed, though small, interest groups, exert its huge power in favor of no social agenda at all.  So, I could tolerate a few cringe-worthy social policy perspectives, from either left or right,  in order to get the really higher priority economic issues on a better path.

We did come very close to what I think would have been, overall, a better result.  If the election were a few days earlier, before Hurricane Sandy took Romney off the front page and put the President in the role of Rescuer in Chief…  or a few days later, after the further doubts about Benghazi emerged in the main stream press, and Petraeus resigned in shame, and the increasing Katrina-ization of Sandy’s aftermath, Romney could have squeaked thru.  As it is, Obama’s “victory” was less emphatic (a narrower popular vote margin and fewer electoral votes) than his initial election 4 years ago; and it was pretty thin in any event.  50 million plus people voted for the other guy…and some of Obama’s crucial electoral college wins were in fact very close.

Still, as everyone now observes, the Romney/Republican campaign failed to adequately capture the confidence of key…and growing…segments of the electorate, especially the young, women, and Hispanics and other immigrants.  If they fail to better welcome and respond to these groups, shame on them.  They won’t deserve future electoral victory and they probably won’t get it, despite the very high relevance to these groups of the key Republican themes of smaller, less intrusive government, self-reliance, and upward economic mobility thru one’s own effort.  It now seems clearer that they won’t get enough people to adhere to this set of values unless they also share more common ground on important social issues as well.  If Democrats, in turn, can also move from their current stance closer to the center on issues of long range fiscal discipline, we could all celebrate a very happy new day in American politics and be much more optimistic about the life of our nation going forward.

A Time for Compromise

Everyone says that they hope for it, and the “fiscal cliff” at year-end provides a deadline to get serious about it, but the actual political and structural fundamentals for compromise don’t look especially promising.  Yesterday, three days after the election, Obama, still in hot campaigning mode,  had selected citizens standing on risers behind him…in the East Room of the White House (!)…as he claimed a popular mandate and brandished his pen in a challenge to Republicans to send him legislation to sign that met his requirements of increasing taxes on wealthier Americans.  Meanwhile, the Republicans claim a mandate of their own, retaining control of the House and still having filibuster capability in the Senate.  Whatever mandate that is, however, is also pretty skinny; they now will hold fewer seats in both houses than before.

So, maybe those chastened positions, on both sides, provide an environment for progress; and maybe the first element of a recipe for collaborative success relies on a careful parsing of the respective rhetoric on taxes.  For a long time now, there’s been a deliberate obfuscation (particularly, I think, by Democrats) of the crucial difference between rates of tax, on the margin, and absolute volumes of tax collected.  Republicans insist on no increase in rates (and argue strongly for even reducing them); Democrats insist on making the “millionaires and billionaires” pay more.  Instead of comparing warren Buffet’s, or Mitt Romney’s, tax rate with the rate their secretaries pay, let’s have both sides acknowledge that you can increase the amount of tax anyone pays, without increasing the marginal rate…or even when lowering it… if allowances or deductions are reduced or eliminated and if additional categories of income are subjected to tax.

With the right leadership, the American people are smart enough to grasp this structural choice and the arithmetic involved  and to at least then intelligently debate the merits of marginal rate increases or decreases as incentives or disincentives toward economic growth.  The data, such as exists, is regrettably not conclusive on this.  For now, it’s more a matter of faith and logic on the side in favor of low marginal rates and a sense of distributive fairness on the other.  But, if the wealthy have their allowances reduced such that they actually pay more than they do now, even with no rate increase, the revenue increase the Democrats want should occur.  And, if the no increase in marginal rates that Republicans insist on actually does spur economic growth, there will be a potentially huge bonus in the resulting increased revenue across the board.

Romney alluded to this in the first debate, almost in passing…suggesting a cap on itemized deductions of a certain dollar amount (or perhaps a certain percentage of income) that can be used for whatever item (mortgage interest, charitable contributions, state taxes, etc.) that is most salient for each individual wealthy tax-payer.  No-one’s favorite deduction has to bear the entire burden.  And, if that cap is small enough, the amount of tax actually collected from the wealthy can increase even if their marginal rates come down.  Victory is available to both sides here.

A Bigger Fight over Entitlements.

More revenue from the wealthy, alone, won’t solve the problem of annual trillion dollar deficits.  There isn’t enough income or wealth among the wealthy to solve the problem even if the government confiscated all of it (and what’s left then for a second act?).  Much reduced spending is even more essential than revenue increases, particularly reductions in the area of our expected “entitlements” committments.  Here, the Democrats have the longest road to travel.  At least they are no longer asserting that there is no problem.  There is…and a very big one.  The demographics are working against these programs and the reserve “funding” is imaginary:  the government’s own IOU’s.  Major structural changes are necessary, and fast.

The Democrats will need to quickly abandon their pledges never to do anything to change these programs’ benefits nor ever employ viable alternative funding mechanisms.

To me, it seems that the only politically workable solution is to employ a combination of some form of grandfathering for current beneficiaries with many partial solutions for the future so that opposition to any one of them is too small to wreck the whole package:

  • postponed retirement ages
  • increased payroll tax rates
  • larger taxable base
  • means-testing of benefits
  • partial privatized accounts (maybe increased IRA and HSA opportunities, funded by a part of the payroll tax)
  • vouchers for parts of Medicare/Medicaid benefits (see blog post of  March 3, 2010)
  • mandated catastrophic insurance coverage, in addition to or in lieu of mandated “first dollar” coverage (also see blog post of March 3, 2010)
  • portions of governmental components’ prefunding committed to real, third-party investments, instead of Treasuries.
  • and, probably some additional solutions as well.

Further, gradualism will be key, so that everyone has an appropriate chance to anticipate and plan for what changes, if any, in their costs and benefits will occur.  We don’t need to completely solve this problem over night.  We just need to be on a credible and committed path to getting it solved eventually.

The American people are neither stupid nor blindly self-interested.  Let’s abandon all the pretenses. With a sensible plan and effective leadership, we can solve these problems.  To quote President Obama’s closing exhortation yesterday:  “Let’s get busy!”  Regardless of our vote on election day, we can all agree with that.

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