Monday, March 7, 2011

Don't Look to Tyler Cowen for a Solution to the Government Fiscal Crisis

Tyler Cowen knows the current spending going on by the federal government is a road to disaster. He takes a stab at explaining the problem in his NYT column but falls far short. In addition, he  babbles a bit in his column about going off the Keynesian tracks and he totally crashes by the time he recommends a "solution". He writes:
As Matthew Yglesias from the Center for American Progress has proposed, President Obama could pledge to veto any budget that increases the projected medium-term deficit, relative to the status quo. He should include in that veto threat any deficit increases that arise from annual budgetary gimmicks like patches to the alternative minimum tax or the “doc fix” adjustment of Medicare reimbursement rates.

Such an announcement would not fix healhcare costs, but it would force us to recognize them, and would move us away from purely short-term planning. It would force the government to consider both spending cuts and tax increases.

In any case, the rigor of the numbers will soon sweep away the fiscal illusion. The only question is whether we will end the charade on our own terms or continue to play the fool.
Say what, tax increases as a solution? How the hell is that a solution, when earlier in the column Cowen writes?:
James M. Buchanan, a Nobel laureate in economics — and my former colleague and now professor emeritus at George Mason University — argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains 
If Cowen actually believes this, then he knows increasing revenues is not a solution. The "permanent disconnect" will see to it that new revenues equal more spending, damn the "medium term" deficit .

A sea change must take place.  Not an announcement from the President, as Cowen suggests, that "would not fix healthcare costs." If Cowen is an economist, why isn't he talking about the inefficiencies of a government run healthcare program and offering real solutions that move the government out of the business?

Further, it appears that Cowen doesn't understand the full gravity of the situation. It is not only a medicare and medicaid problem. The Social Security fund has gone cash flow negative, this year. This means the trustees of SS are going to start cashing in those Treasury securities they hold, and the Treasury has no money to pay those off. Anyone that thinks the SS system is sound until the distant 2040 doesn't understand basic finance. The "funds" in the SS system are the equivalent of Bernie Madoff IOU's. For Cowen to not bring this up in his analysis is shocking.

Bottom line: The system is on the edge of collapse. Cowen has gotten himself on record as a result of his NYT column as warning about the fiscal problems, but he doesn't appear to understand the full depth of the crisis and doesn't come near calling for any cutbacks in government that would be the only real solution to stop this runaway train. In other words, don't look for the solution from Tyler Cowen.

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