No Exit October 20, 2009Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, politics.
Tags: budget deficit, Two Santa Claus Theory
One could argue that in theory liberal democracies should exhibit a repeatable pattern in their politics.
Voters elect liberals who promise lots of social programs to improve people’s lives. But these social programs are expensive so they have to raise taxes to pay for them. The public eventually takes the social programs for granted but gets tired of high tax rates. So they elect conservatives who cut taxes and restrain spending on social programs.
But eventually the need for more social programs becomes acute and the liberals are elected again and the cycle begins anew.
In the U.S., this pattern was interrupted by the Reagan revolution and the Two Santa Claus theory—more formally known as supply side economics. Republicans discovered they could stay in power by cutting taxes (Santa 1) and increasing spending (Santa 2). And for 30 years it worked, thanks to the willingness of China, Saudi Arabia, etc. to buy our Treasury bonds. We buy their stuff; they use that money to buy U.S. securities—everybody is happy.
Until, of course, at some point the budget deficit will get out of hand. There is a good deal of debate among economists regarding whether we have reached the point where budget deficits will harm the economy—with interests rates low and no inflation on the horizon it would seem we haven’t reached it yet. (and no, the budget deficit is not the result of Obama’s policies—it is a holdover from the Bush Administration)
But eventually the budget deficit must come down or interest rates and inflation will take its toll.
So what are the options?
We can (a) cut government spending, (b) raise taxes, or (3) hope the rest of the world will continue to finance our deficit indefinitely. I see no evidence that the public is willing to see their taxes increased or their services (along with military expenditures) cut. The Two Santa Theory is now part of the public’s expectations.
That means our fate depends on the rest of the world. If or when China and other countries decide they have to reinvest their cash in their own economies or conclude that the U.S. is not a safe investment, the dollar will slide and interest rates will skyrocket.
Then the party will be over.
Both Santa’s will be out of a job.
Did I mention today is a glass half empty day?
For political commentary by Dwight Furrow visit: www.revivingliberalism.com