Saturday, April 26, 2008

The Discussion About Taxes

The real discussion on taxes, hopefully, has begun. The New York Times, in it’s lead editorial of Thursday, April 24, 2008, headlined the “Empty Talk on Taxes” presented a case for raising taxes. It began by saying—

“One of the toughest questions that will face the next president is what to do about taxes. There can be no real progress on health care, rebuilding the military or any other major issue without dealing with rising budget deficits and mounting debt…”

And, it ended—

“Perhaps the candidates are afraid the American people can’t handle the truth about what it would take to meet the nation’s economic challenges. Or perhaps they are underestimating those challenges.”

For the complete editorial, see

I have been arguing for quite some time now that the number one issue that will be facing any new administration will be the decline in the value of the United States dollar. There is only one way to halt the decline in the value of the dollar, let alone strengthen it, and that is to substantially reduce the government’s budget deficit and follow a monetary policy that is focused (almost) solely on constraining inflation. The problem is the timing.

The current focus of America is on the recession and the financial instability that now exists within U. S.-based, as well as internationally-based, financial institutions. And, with new reports coming out almost daily about weak economic conditions or another bank being in desperate need of raising additional capital, the focus of the press will not be taken off the current economic conditions within the United States. To begin any discussion about the economic and financial policies that are necessary for strengthening the dollar will be difficult, at best.

The “economic challenges”, to quote the NY Times, are going to be substantial and to talk of this “truth” is difficult if one is trying to get elected. Also, the best guess is that the “challenges” are being underestimated because those connected with the candidates are trying to get nominated and then elected. These “challenges”, whatever they are can be dealt with later.

But, the problems are not going to go away. Whereas the inflation that took place in asset prices has burst, the inflation in commodity prices continues on apace. And, as long as this takes place the value of the dollar will continue to decline. My best guess is that, in terms of family, business, or investment decisions, individuals must be prepared for a lengthy period of time in which uncertainty will be substantial and volatility in markets will be commonplace.

The reason why I believe this will be the case is that the United States is the only major country in the world that is not playing by the rules of the international monetary system. (I discussed this on my April 14 post.) Other nations have given up a lot in order to bring themselves into line with these rules and have suffered further because they have stuck with the rules while the Bush administration has not. This is why the United States is not getting a lot of cooperative movement on the part of other central banks to help it bail itself out. Eventually, it, the United States, will have to join the international financial community and go through the necessary pain to get itself on the right path.

I believe that this fact need to be considered in every decision to be made concerning the family, business, or investment interests of Americans over the next two to three years.

Aside: Robert Barro, Professor of Economics at Harvard, in the latest edition of his book “Macroeconomics” (pages 359-360), discusses how a presidential administration might “strategically” manage the federal budget so as to have a large impact on the budget decisions of the administration that follows it. Basically, he writes, the incumbent administration can create such large budget deficits that the following administration will be severely limited in what it can do because it must deal with the deficits that it has inherited. Barro specifically mentions the Reagan (and Bush 41) administration creating a situation in which the Clinton administration was limited in what it could do, once it attained office. To quote Barro:

“Arguably, this is what happened in the 1990s. In this sense, the Reagan-Bush strategic budget deficits may have worked.” (page 360)

Is this what Bush 43 has done?

Is the budget mess, the dislocation of the economy, the inflating commodity prices, and the declining value of the dollar…all to keep the following Democratic administration from initiating policies that the Bush administration does not want to see enacted?

You decide!

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