January 31, 2013

Thirteen: Year of Magical Thinking

Patrick Marren
Partner

Today's political situation is quite depressing. And it's all because one side does not believe in mathematics.

No, it's not the Republicans.

Nor is it the Democrats.

It's both of them... or neither, depending on the issue.

Democrats simply can't understand mathematics. They want to keep spending and spending, and they think that the economy will somehow magically grow so much in response that it will more than pay for all the spending.

On the other hand, Republicans simply can't understand mathematics. They want tax cut after tax cut, and they think that the economy will somehow magically grow so much in response that tax receipts will RISE.

On the other hand, Democrats are hard-nosed realists who know that you have to respect arithmetic. Didn't Bill Clinton say it at the recent Democratic National Convention? And when he was president, he raised taxes as we were coming out of a recession. Almost every Democrat in Congress voted for his 1993 budget bill; ZERO Republicans did. And Republicans predicted the end of the world, because of course austerity is deadly to a recovering economy. And of course in response to this program of austerity...we went into the biggest boom in world history.

On the third hand, Democrats are wishy-washy and Republicans are the hard-nosed realists. Republicans point to frightening graphs and spreadsheets of a tsunami of red ink, and demand that entitlement reform be enacted immediately. Democrats refuse, saying that it's all a plot to kill grandma in order to preserve low tax cuts for wealthier people. Republicans say it's just math.

On the fourth hand, when Democrats pushed to raise taxes on the wealthiest people last year, they said it was just math. Taxes had to go up on the rich, or we would face, you guessed it, a tsunami of red ink in the future. And how did the mathematicians in the Republican party respond? They said that if you raised taxes on the wealthiest Americans, then it would destroy jobs because the investing classes would not hire anyone. And that would lead to lower tax revenues because fewer people would be working.

On the fifth hand, Democrats say that lowering taxes on wealthy people does not create jobs, because the money does not get spent; it either goes into Treasury bonds or other safe assets, or it gets spent on luxury items like yachts or foreign cars that American workers rarely make. And they say that federal taxation as a percentage of GDP has spent the past four years far below its historical level as a percentage of GDP, and yet we are not anywhere near to a robust recovery. 

On the sixth hand, Republicans say that federal government spending has spent the past four years far above its historical level as a percentage of GDP, and yet we are not anywhere near to a robust recovery. 

On the seventh hand, Democrats say that that is mainly because GDP took a 9% dump in 2008-9, and so spending as a percentage of GDP was always going to seem much higher; while tax rates as a percentage of GDP are therefore even more scandalously low, because they have been near an all-time low even as a fraction of that lower GDP.

On the eighth hand, Republicans say that Keynesianism says we should be in nirvana by now with all this spending and low taxes, and yet we are not.

On the ninth hand, Democrats say that the government stimulus in 2009-10 was only a third of what was recommended by economists, and it probably saved us from Great Depression 2.0.

On the tenth hand, Republicans say that it was still an all-time post-World War II record for deficits, and the national debt has grown by about 50% under Obama.

On the eleventh hand, Democrats say that Ronald Reagan more than doubled the national debt during his eight years, and Bush 43 doubled the debt from 2001-2008, and the Republicans said almost nothing. 

On the twelfth hand, Republicans say that took place before the Baby Boom retirements were imminent, but now we can't afford that kind of thing.

On the thirteenth hand...that's too many hands. 

What does history tell us? 

1. Both parties will say that they believe in math and the other side is engaged in magical thinking.

2. Both parties will say in the next breath that their preferred fiscal solution (more/preserved government spending for Democrats, more/preserved tax cuts for Republicans) is the route to salvation, and the other side's is a recipe for disaster.

3. Austerity policies in 1993 were followed by the biggest boom in world history.

4. Austerity policies in 2011-13 in Europe have been followed by a second recession and seem to have worsened the debt problem.

5. Expansionary policies (tax cuts, increased government spending) under Reagan led to what was then the biggest boom in history; but the largest tax increase in history, in 1986-7, was followed by continued boom. 

Bottom line: If you are serious about planning for the future, you had best prepare for futures in which "Democratic" policies are pursued and work; "Republican" policies are pursued and work; "Democratic" policies are pursued and do NOT work; and "Republican" policies are pursued and do NOT work. You might want to mix in a few futures in which one side's policies are pursued, then another side's.

In other words, you guessed it - scenarios. 

One scenario you can bank on, though: In the future, neither side will ever admit that reality has disproved either their mathematics or their "magical thinking." There's always an out for ideologues and economists - that's the damnable nature of reality. 

Have a magical 2013!

Thoughts?