Asymmetrical Information - Megan McArdle

01.08.13

Washington Goes Platinum

Short-term non-solutions to long-term problems.

I am still trying to wrap my brain around the idea that the hottest topic in Washington today is . . . collectible platinum coins.  I mean, seriously.  And this is not one of those stories where you find out that there are actually smart policy reasons why pundits and legislators are spending hours debating whether the president has the authority to mint a trillion or so worth of platinum coins; if anything, the story is even stupider than it sounds.  Which just about sums up today’s budget politics.  The platinum coin story tells you everything you need to know about DC’s broken budget politics—except how to fix it.

I hope you'll pardon me while I go off on a rant here.  The trillion dollar platinum is an absurdity wrapped in a legislative incongruity inside a farce.  It is the logical extension of an utterly illogical legislative process that only becomes more irrational with each passing day.   Each partisan battle has become stupider than the last.  Silly loopholes are exploited for bargaining power, and the resulting stalemates are generally solved with a temporary patch that solves the immediate problem by creating a bigger one down the road.  When the bigger problem arrives, naturally the other side seeks an even sillier loophole, resulting in an even more temporary patch.

We are now approaching the era of permanent fiscal crisis.  As soon as legislators finished their New Year’s negotiations over a deal to avert the fiscal cliff, the commentariat emitted a collective sigh, then turned to debating . . . our next budgetary calamity, due in February when the deficit pushes government spending beyond the Treasury’s legal authority to borrow money.

Mere words can hardly convey the preposterousness of the debt ceiling.  It is a stupid artifact of legislation that was hastily passed in the World War I era, and it creates a paradox at the heart of our budget politics: the law of the land commands the government to spend more than it takes in in tax revenue, and also, forbids the Treasury to borrow the necessary money.  In the last go-round, the GOP exploited this conundrum to extract a package of ham-fisted spending cuts . . . you know, the ones we just delayed as part of the fiscal cliff deal, because exactly no one thinks that they are a good idea.  S&P responded by downgrading US debt.  Under the banner of fiscal responsibility, we trashed our credit rating.

As we once again approach the legal limits, left-liberal commentators, most notably Paul Krugman, are now getting behind the idea that the President ought to exploit his own loophole:  a law passed allowing the government to mint platinum coins of any denomination.  If the GOP won’t raise the debt ceiling, they say, the president should simply mint a $1 trillion coin, deposit it at the Fed, and continue paying the nation’s bills.  Never mind that the law was never intended for this, and that these sort of hypertechnical legislative games might trigger the very political and financial crises they are supposed avert.  Seemingly, the most important thing is for the president to defeat intransigent Republicans—even if that means that the president “for all Americans” who once spoke of winning the future and healing the planet will be reduced to presiding over the Franklin Mint.

The Great Platinum Coin Caper is everything that is wrong with Washington: a stupid partisan maneuver that erodes the institutions of our government for no gain other than an immediate political win. The only good thing that can be said about it is that the President seems to be too sensible to actually consider doing it.  Nonetheless, the fact that intelligent people like Professor Krugman are even discussing this debacle, much less endorsing it, is a depressing reminder of just how nasty and short-sighted our nation’s capital has become.

When I was reporting on Wall Street, I used to be told with some regularity that government was needed to counteract the short-term thinking of the business sector, who never thought much beyond the next quarterly earnings report.  This now seems as quaintly adorable as picture hats and daily milk deliveries.  An ADHD day trader with a cocaine habit and six months to live has considerably more long-term planning skills than our current congress.

Consider the fiscal cliff deal that we just passed.  Virtually every economist agreed on what needed to happen: Congress should extend all the tax cuts and spending hikes temporarily, because any fiscal tightening would also reduce economic growth and raise unemployment.  But because our current trillion dollar deficits are entirely unsustainable, Congress should also set a deadline to have all or most of these temporary measures expire.  My favorite proposal would have pegged the expiration to the unemployment rate.

In a month-long round of backroom bargaining interspersed with public name calling, our politicians essentially managed to craft the opposite of this deal.  We raised taxes immediately, which will put pressure on a still-weak economy.  On the other hand, we also made the overwhelming majority of the Bush tax cuts permanent, at a cost of trillions over the next ten years.  Just as Baby Boomer retirements put unprecedented pressure on the Federal budget, we have decided to fix tax revenues at the low end of their historical average.

Why did we combine an immediate contractionary tax increase with long-term fiscal irresponsibility?  Borrowing costs are currently very low, and the tax increase Obama ultimately won from Republicans will raise about $40-60 billion a year—not nothing, but nowhere near what will be needed to shrink our trillion dollar deficit.

But tax hikes on the middle class are unpopular, even if they take effect later rather than now. On the other hand, taxes hikes on the rich are very popular.

Try this exercise: name some of President Obama’s campaign pledges.  Unless you were actually covering the elecetion, I bet you can only name one: the pledge to raise taxes on people who made more than $250,000.  No new programs to solve some problem, no high-concept bargain to unite the nation . . . no, the one thing that Democrats wanted to do was raise taxes for 2% of taxpayers, and only 2% of taxpayers.  Not to pay for anything in particular, but just because the rich had too much. And why was this—rather than some actual policy program—the centerpiece of his agenda?  Because his base liked it, and because opposing it made the ultra-rich Mitt Romney look like a selfish heel.  

Having run almost his entire campaign on this one small item, his base was eager to see him follow through—and more importantly, to see him force Republicans into concessions on taxes.    The utter fixation on this non-policy policy was bewildering to an outsider: was it really more important to get a symbolic win than to coddle the frail economy?  Or to try to heal the growing rift between the parties?    It’s like watching a friend decide to fix her credit score, and her marriage, by getting a makeover.

This magical thinking pervades my home city these days; all of Washington seems to have convinced itself that Congress has the legislative power to repeal the rules of arithmetic.  During the 2011 debt ceiling battle, if you asked Republican zealots what they thought would happen when the government hit the borrowing limit, they replied that Democrats would be forced to give in and cut spending.  In vain did I—and many others—point out that once you got through interest on the debt, old age entitlements, veteran’s benefits, and military and family housing, there would be no money left.  Were they going to get rid of the border patrol? Strand active-duty soldiers in Afghanistan?  Stop safeguarding nuclear waste and repairing the highways?  Emboldened conservatives had no answers except a stubborn insistence that they weren’t going to authorize any more borrowing—or taxes.  They wanted a victory, not a plan.

For a while, Democrats could pride themselves on being the reasonable ones. Now they, too, are choosing words over math.  “We don’t have a spending problem,” President Obama apparently blithely told the Speaker of the House.  Which is technically true . . . if we’re willing to raise the government’s tax take to north of 50% of Gross Domestic Product.  But that will mean big tax hikes on the middle class, something that President Obama has just proven himself entirely unwilling to consider.  As long as we tax our citizens at American rather than Danish levels, our spending problem is very big indeed.  

The Republicans could declare, with equal truth, that we don't need to raise taxes.  Which we don't.  That is, if we decide not to spend so much money.  Which we haven't.

But confronting our spending problem, and our tax problem, is going to be extraordinarily painful.  An aging population and a lackluster economy mean that there is no money for exciting new legislative initiatives—or even for easing the pain of putting our finances on a sound footing.  Everyone wants to preserve entitlements, but no one wants the taxes needed to pay for them.  Everyone wants tax cuts, but no one wants to trim spending to match.  Everyone wants to go to heaven, but nobody wants to die.

And so we are getting minute-to-minute strategy at exactly the time that we most need creative long-range planning to address the pressures we face from an aging population.  Legislators are no longer thinking ahead even as far as the next election; all their focus is on the next Pyrrhic victory.     The very worst thing about this stupid platinum coin idea is that it's the most practical, results-oriented solution that has so far been suggested for our current problems.