This post relates to news that is from way back in mid-June but is becoming increasingly relevant with (a) the “sequestration” idiocy of 2011 (thank you, GOP) and “sunset” stupidity of 2001-2003 (thank you, Democrats), a/k/a the fiscal cliff, fast approaching and (b) both national party conventions featuring plenty of speeches on why their party is best positioned to slash deficits and restore ‘fiscal order’—which, if they ever bothered to define and think through, might make clear how dangerous all of this nonsense is.
While we’re at it, we can add Clinton Treasury Secretary Bob Rubin to our “not the smartest guy in the room” list of the rich and powerful, as it was he who almost singlehandedly got the entire press corps and Democratic Party to believe that government “borrowing” causes higher interest rates and “crowding out” of private sector financial activity. Dishonorable mentions go to Peter Orzag and William Gale, as well as Newt Gingrich, although the list could be much longer.
So why does being (or not being) the smartest guy in the room matter? Or more appropriately, when does such a normally irrelevant question matter? It matters when the rest of us contemplate the advice of people who are powerful and influential, but not necessarily correct or even well intentioned. Because when we assume that such people are more intelligent than us and guided only by their better angels, we do ourselves no favors by accepting their advice at face value.
There is one small irony in this matter though, given that the fiscal cliff is now only four short months away. And that is that Simpson-Bowles, despite its sadly mistaken foundational assumptions and ill-informed objectives, probably would be preferable to the big bath awaiting us in January. Granted, there may be ways to cushion the blow in 2013 if nothing is done; taxes could be lowered significantly, which the Tea Partiers and GOP should be willing to support (if not for their consistent errors in asking how to ‘pay’ for it), and counter-cyclical spending increases would occur automatically. But both of those are likely to kick in only after real damage has been done.
In any case, here’s what Dimon said to Congress back in June, and why, at least on fiscal matters and their impact on financial markets and economies, he is decidedly not the smartest guy in the room, despite what his HBS credentials and professional success might seem to imply.
…the banker’s most passionate plea to the lawmakers was one that Republicans most emphatically don’t want to hear: Enact the Simpson-Bowles debt proposal, a package of spending cuts and — gulp — increased tax revenue that was largely scuttled by House Republicans.
“If we had done something remotely like Simpson-Bowles,” Dimon said in response to Sen. Michael Bennet (D-Colo.) at the end of the hearing, “you would have increased confidence in America. You would have shown a real fix of the long-term fiscal problem. I think you would have had . . . a more effective tax system that is conducive to economic growth.”
First, there is no “long-term fiscal problem” for a government that is the sovereign issuer of our currency. (For credit-obsessed and trade-obsessed viewers, read that as “the only net issuer of our currency.”)
Second, it’s a stretch worthy of Rex Reed to argue that fiscal issues have caused a confidence problem that is now the main headwind to U.S. economic performance. Several competing explanations are far more compelling, although admittedly less helpful to someone trying to turn the spotlight back onto his—”fawning,” according to the article—interrogators. They include the fallout from the most severe U.S. financial crisis since the 1930s, a massive household balance sheet recession, and shifting demographic internals, all of which point to a widespread shortage of aggregate demand. And even the most bitterly opposed macroeconomic paradigms tend to agree that such a condition argues for more, not less federal government spending and lower, not higher taxes.
Mr. Dimon is absolutely right that we should make the federal tax code more conducive to economic growth. We just shouldn’t do it in the anti-long-term-growth manner he prescribes.
…he said, not enacting such a plan “helped cause a downturn last year.”
As I remember it, most of the upheaval in the last two years has emanated from the eurozone, which was founded on the misinformed ideas (let’s call it what it really is—economic malpractice) of Dimon, Rubin and most of the modern economic and financial profession. The eurozone crisis has repeatedly threatened the solvency of Europe’s financial system and, much as Dimon’s profession did in 2008, the global payments system itself. Yet in 2008, the fiscal ‘issues’ that have now worked Dimon’s policy passions into an urgent lather were largely nonexistent.
And when the U.S. debt ceiling impasse was finally “resolved” in 2011, the U.S. economy and markets got back to business, despite the fact that there was absolutely no action taken that echoed the debt commission’s. (On a side note, a more accurate name for the debt commission might be the ‘non-government sector savings commission’.)
…Dimon had a more deserving target for his criticism than Democrats and regulations: a demand to “get our fiscal act in order” before the election and before automatic tax increases take effect next year. The Simpson-Bowles plan “is a road map which I like,” he said, and the important thing is “getting something like that done.”
If Dimon is the senators’ best friend, as their fawning suggests, perhaps they’ll take this advice seriously.
Let’s hope not.
Again, to be fair, the 2013 spending cuts and tax hikes are like a loaded cannon pointing at the gut of the American economy, and Simpson-Bowles pales in comparison as far as doing a lot of damage in a short time. But neither the fiscal cliff nor the commission recommendations are good policy, and it would be especially nice to hear at least one of the major parties admit it.
Instead, we’re treated to Bill Clinton’s fond remembrances of budget surpluses, President Obama’s disdain for deficits, and Representative Ryan, like Newt Gingrich 15 years before him, throwing dirt on the true legacy of supply-side Reaganomics—that in our current institutional framework, sufficiently large federal deficits are conducive to economic growth under most conditions. Clearly, David Stockman, the architect of the late Reagan-era tax hikes (the last time we forcefully “broadened the base”), also deserves dishonorable mention. Let’s throw David Walker, Jagadeesh Gokhale and Kent Smetters on there while we’re at it. Heck, there’s even room for Art Laffer.
Unfortunately, it seems very unlikely that either party will dare to embrace the deficit-enlarging aspects of FDR’s, Kennedy’s, Reagan’s, and G.W. Bush’s fiscal policies. And that means that both the risk of future recession and the staggering underemployment of human beings remain higher than they need be.