Late Friday, Standard and Poor announced that it had downgraded its rating of US Treasury bonds. Monday, the stock market fell like crazy as everyone sold stocks and bought- you guessed it, US Treasury bonds! (Gold, too). Today, the stock market rose and fell like crazy, but finally went way up. Conclusion: something’s wrong, but no one is sure what.
Naturally, people in government are doing two things:
- Blaming each other
- Looking for solutions
I’ll skip the blame (it wasn’t my fault, honest!) but say a word about solutions. But in doing so I want to emphasize one disagreement I have with many people I normally agree with. In an earlier post I made the point that:
- It’s not about the deficit!
Now I want to add a second point:
- It’s not about the tax base, either!
Many progressives have been pointing to part of the S&P report that says the insecurity of US debt would go away if the so-called “Bush tax cuts” were allowed to expire next year. As you probably know, those tax cuts were larger for those with incomes over $250,000 a year, and larger still for those with much higher incomes.
Let me be clear: I am absolutely, totally in favor of raising taxes on the rich. Among other things, doing so would help reduce the obscene level of economic inequality that is destroying our society. Taxes can be a powerful tool for increasing equality, and I’d like to see that tool used.
However, we do not need more taxes to make federal debt secure. Unlike Greece (for example), the US debt is denominated in dollars – so the US can always pay off that debt, if necessary by printing more dollars. The only thing that makes US debt insecure is that Congress has passed a law saying that we can’t borrow more money once we have reached the ceiling – and a sizable bloc of members of Congress have said that they will never vote to raise that ceiling.
Congress did vote to raise the ceiling last week, but only at the last minute, and only by imposing terrible conditions. In particular, Congress voted to make budget cuts that will eliminate something like 1.8 million jobs by the end of 2012.
Eliminating that many jobs is going to devastate the economy. It is just the opposite of what we should be doing. If we spend the money to create jobs (and there is plenty of work that needs doing, including rehiring laid off teachers, firefighters, police officers, health inspectors, etc.), the economy will start to grow, and tax revenues will go up eventually.
It’s not just an ironic wrinkle that investors were buying Treasury notes yesterday. Despite S&P, everyone knows that these notes continue to be the safest investment in the world. If the selloff had any cause beyond irrational jitters, it was the knowledge that if we stay on our present course we are going to eliminate 1.5 million jobs, cut consumer demand, and as a result very likely throw the country back into recession.
In this context, arguing about the Bush tax cuts is just a distraction. Worse, it accepts the false view that the problem is the deficit, rather than the recession. Congress and the President should stop worrying about the deficit and turn their attention to creating jobs.