Of tea parties and sunshine patriots

A friend of mine recently emailed to me an invitation to join the Tax Day Tea Party, a so-called grassroots campaign to protest out-of-control public spending and to advocate for further tax cuts. Given my staunch fiscal conservatism, this should be something that I can fully support…but it’s not.

First, the cynic and long-suffering budget hawk in me wonders where all of this conservative vitriol was during the past eight years when George W. Bush wrecked the fiscal ship. Mr. Bush was an out-and-out disaster for the public purse, yet hardly a peep came from today’s newly charged fiscal conservatives. Why is that?

It seems merely petulant that so-called fiscal conservatives would choose now to have their come-to-Jesus moment (really more of a case of sour grapes), particularly given the financial and economic straits in which we find ourselves. Don’t get me wrong – I’m pleased as punch that so many folks have awoken to our fiscal troubles, but I am highly suspect of their deeper motives. After all, massive deficit spending didn’t move them to protest with Tea Parties when Mr. Bush was in the White House, when all common sense militated against an expansion of government spending and the Fed’s easy-money policies. Now that deep economic trouble has arrived, it seems odd now to find your cojones vis-à-vis deficit spending.

I suppose my problem is not so much with fiscal conservatives – I am one – but rather with the Republican Party, which will undoubtedly supply the national Tea Parties with most of their protesters. Because of the foregoing, the Republican Party has serious credibility problems. It and its leaders simply cannot be trusted, which is not to say anything of Democrats, many of whom don’t even acknowledge that the growing public debt is a problem.

But there is a second problem here. If you examine the rhetoric of the Tea Party crowd, it becomes clear that they live under the delusion that the national finances can be rectified without tax revenue. Spending cuts are great and very much needed, but to dig ourselves out of the fiscal hole, taxes will likely have to increase, something that the tea-dumpers are loth to admit.

For some of them, it is a chicken-and-egg dilemma. Many would support sane tax policies if only they had any faith that spending could be reined in. For example, the Obama budget calls for an unconscionable 8% rise in spending…that’s in addition to the numerous bailouts and the so-called stimulus package. For many fiscal conservatives, they have simply given up hope that spending can be controlled; therefore, they feel that tax cuts are the last weapon they have to combat irresponsible levels of government spending. Of course, over the long term, that philosophy is a one-way ticket to debt default. It is unreasonable and irresponsible.

There are still other fiscal conservatives who cleave to supply-side economics, a theory which suggests that lower tax burdens translate into greater tax revenues via spurring greater economic growth. This is highly conjectural at best. I have a better and simpler idea – why don’t we just spend the same amount of money that we make in taxes. If we as a people decide to spend more, then tax at higher levels. If you don’t have the guts to raise taxes, then you shouldn’t have the guts to raise spending. I have always distrusted supply-side economics, not because it is wrong – I have no idea whether it works or not – but rather because I am naturally suspect of any theory that promises something for nothing, and I’d rather not turn the public finances into a vast economic experiment.

By suggesting that the array of government services and commitments can be supported via lower taxes, supply-side economics has had the damaging effect of deflecting attention away from where it truly belongs, which is on the level of spending; thus, the supply-sider gets to have his cake and eat it too. It enables him to spend like a liberal while talking up low taxes. He gets to sidestep the tough and unpopular choices associated with spending cuts, but seize the mantle of fiscal rectitude via tax cuts. In my estimation, this is pure political fantasy, just as delusional as paleo-liberalism’s insatiable appetite for constant increases in taxes and spending.

The phrase on everyone’s lips of late – whether talking about stock valuations, home values, commodity prices, or levels of corporate debt – has been “reversion to the mean.” What this really means, if it means anything at all, is that most if not all of the economic growth over the past 15 years has been premised upon asset bubbles. The growth has not been real. And yet, government outlays have increased as if it were real and sustainable. All of the bubbles have now been lanced (except, perhaps, in Treasury notes), and yet the Right and the Left continue with the same old song and dance, the same old political fantasies of unbridled prosperity.

In my view, both the American Right and Left suffer from the same flawed thinking – the belief that our erstwhile prosperity was sustainable. The Right seeks a quick fix to bring back the good times; the Left seeks the same so they can redistribute wealth. Both President Bush and President Obama have been amazingly consistent in their attempts to re-inflate the bubbles that have just burst. But the wealth that has now evaporated was largely illusory to start with; we didn’t it earn it. And it is a mistake to put into place policies designed to recreate asset bubbles.

You see, the real problem here is one of excess consumption.

By way of example, consider the Obama team’s slight, almost neglected tweaking of the tax code concerning the purchase of automobiles. In the past, car buyers used to be able to deduct interest payments on car loans from their taxes. President Obama and congressional Democrats have now taken that deduction away and instead offered the public the ability to deduct sales tax value from the purchase of a vehicle. This is what passes for a “tax cut” in the Obama administration thus far. But aside from the Orwellian application of the term “tax cut,” there is something deeper going on here beyond the revenue shell game.

This subtle shift in the tax code shows you something of the psychology prevalent in policy circles, both Democrat and Republican – the tax-code shift is expressly designed to provide an incentive for people to go out and buy a new car. For folks who are drowning beneath the negative equity of their new homes, a new car is probably the last thing they need, but no matter.

As a matter of policy (if not optics and ethics), this is every bit as crass as George Bush’s exhortation that we should all “go out and shop” post 9/11.

Writing over on McKinsey & Co.’s new website, Stephen Roach (the chairman of Morgan Stanley's Asian operations) restates the problem in a far more eloquent way than I can:

“In the United States, Washington has focused on measures that would sustain excess consumption through tax rebates and other types of income injections. There is also growing support for mortgage foreclosure relief—in effect, perpetuating uneconomic levels of homeownership by many people who simply cannot afford their still-overvalued dwellings.”

Members of both political parties simply don’t understand what is transpiring right in front of them. The economic woes ravaging our country is not called a “correction” for nothing. That’s what happens when people turn their homes into cash machines with HELOCs and cash-out mortgage refinancings. When home prices fall back to earth, as they are now doing, the rug is in effect pulled out from under the larger economy; the excess consumption, fueled by unsustainable levels of home equity, must necessarily vanish. And don’t believe for a moment that home prices have stopped falling – they have another 30% to 40% still to go in order to reach the post-WWII mean. This, of course, affects everything…bank balance sheets, corporate profits, stock market values, 401(k)s…you name it. It should affect government spending, too.

For the reasons explained above, I can’t support the Tea Parties. Their supporters are dead-on right concerning government spending, but the timing is a little off. They are full of passion, but lack credibility. And on the issue of taxes, the last thing in the world we need right now is a tax cut. Let’s focus on the spending issue first.