Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
Writing recently in The Financial Times, the renowned novelist Margaret Atwood nailed the lasting effects of the recent "“ and some would say continuing "“ global financial crisis. "Those at the top were irresponsible and greedy," she wrote; consequently and with good reason, very few people now trust our banking elite or the system they operate.
Today's Economist
Perspectives from expert contributors.
Even Camden R. Fine, president of Independent Community Bankers of America, is now calling for the country's largest banks to be broken up.
But the distrust goes deeper and further, just as Ms. Atwood implies. Many people understand perfectly well that the government let the bankers take excessive risk. There was a high degree of group think among prominent officials in the United States and top banking executives in the run-up to the crisis of 2008. As chief economist at the International Monetary Fund from March 2007 through August 2008, I observed some of this firsthand.
And politicians are also tarnished. They appointed the officials who failed to regulate effectively. And in 2007-8 the politicians decided to save the big banks "“ and most of their managers, boards and shareholders "“ both under President George W. Bush and under President Obama. Now attention turns toward the federal government’s fiscal problems, including the complicated mess that is our tax system. Politicians say they want "tax reform," but can you trust them to do this in a responsible manner, without falling captive to particular special interests or to otherwise undermine the general social interest?
The latest indications from Mitt Romney are not encouraging. Mr. Romney is proposing a tax overhaul that he says would be revenue neutral. But his actual plans amount to cutting tax rates, particularly for high-income people, while not closing enough loopholes to make any difference (see this assessment by my colleague and co-author James Kwak, or this take by Matthew O'Brien of The Atlantic).
At the same time, President Obama is focused on increasing taxes for relatively well-off Americans. Mr. Obama wants to make the Bush-era tax cuts permanent for people earning less than $250,000, while not extending them for people with income above that level. What exactly will control the trajectory of deficits and debt in that scenario?
Perhaps we should trust our politicians to control future health-care spending, even though none of them can specify exactly how this should be done. But what is really likely to happen given that health-care providers "“ hospitals and doctors — are a powerful lobby, while insurance companies may be even stronger?
All significant loopholes, including the tax exemption of employer-provided health benefits and the tax deductibility of mortgage interest payments, will be defended fiercely by powerful special interests.
Top military officials seem willing to curtail spending, but members of Congress frequently resist base closings and the cancellation of weapons programs. President Eisenhower famously warned against the military-industrial complex; perhaps we should update that to acknowledge that it's the industrial-political complex that's the danger.
The financial crisis blew a giant hole in our budget and, with good reason, greatly undermined confidence in our political elite. Gridlock in Washington has reached a new peak "“ President Obama proposed the Buffett Rule, which would have raised a very small amount of additional revenue by creating a minimum tax rate of 30 percent on all income over $1 million, and the Republicans immediately blocked consideration of it in the Senate.
Most of what poses as "tax reform" in Washington today is actually tax reduction. With our public finances in their current state, this is the last thing we need. The idea that reducing taxes "pays for itself" through higher growth is just wishful thinking; in our new book, James Kwak and I debunk this in part by citing the research of Greg Mankiw, former chairman of the Council of Economic Advisers under George W. Bush and a key adviser to Mr. Romney.
Yet Mr. Romney and Mr. Obama are likely to compete in November partly on the basis of their tax-reduction proposals.
May we hope that there are ways to bring our national debt under control? Prospects are not so gloomy, for two reasons.
First, if true gridlock prevails, the Bush-era tax cuts will expire at the end of this year. Whatever happens in the November general election, the Democrats and the Republicans would need to agree in order for these tax cuts to be extended. It is quite possible that this will not happen.
That's a big fiscal adjustment, to be sure. But it could well be buffered by a temporary payroll tax cut, linked to employment relative to population. As employment recovers, the payroll tax cut would fade away.
Second, one day soon the private sector will wake up to the fact that rising health-care costs are undermining the American economy, and making it much harder to earn a profit.
With money-driven politics, the only way to fight a lobby is with a bigger lobby. American businesses are typically reluctant to trespass into someone else's sector. But they will do it when their own bottom line is at stake "“ as, for example, when they resist various forms of protectionism.
Health-care costs are not under control; we pay more for the same or less-good services over time; this is like the worst kind of taxation. In 20 years, the adverse impact of health-care costs of businesses will be much worse than any negative effects of taxes.
But don't wait for the politicians to take this on. The problem is far too important and that route will take too long. Talk instead to private-sector executives and entrepreneurs. Persuade them that health-care costs need to be brought under control, and force them to think about how they can push the health-care industry in this direction.
Don't leave banking regulation to be decided by the banks. And don't let the health-care industry control the discussion on what needs to be changed in cost of the delivering medical services.
Mr. Fine is now willing to take on the big banks; he should be commended and supported more broadly on this basis. By working on this issue at the highest political level, he can help restore grassroots confidence in community banking.
Who within the private sector is willing to take on the health-care lobby? Who will take the lead on restoring trust in our market-based economy more broadly?
E-mailPrintRecommendShare CloseTumblrDiggLinkedinRedditPermalink banks, budget deficit, Camden R. Fine, Daily Economist, deficit reduction, employer-based health insurance, Margaret Atwood, military spending, politics, Simon Johnson, tax cuts, taxes, U.S. health care costs Related PostsFrom EconomixThe Limits of American ExceptionalismRepublicans and Fiscal ResponsibilityIs There a Fiscal Crisis in the United States?Will the United States Default?Republican Split, Democratic Opportunity Previous Post Do Small Businesses Create Jobs? Next Post Income of Rulers vs. the Ruled// jQuery(document).ready(function($) { NYTD.commentsInstance = new EmbeddedComments($, 'NYTD.commentsInstance'); NYTD.commentsInstance.init({configName: 'default'}); }); // /**/// if ((typeof adxpos_SponLink2 == "undefined") || (typeof adxads[adxpos_SponLink2] == "undefined")) { if($("SponLink2")) { $("SponLink2").hide(); } } // /**/// if ((typeof adxpos_Position1 == "undefined") || (typeof adxads[adxpos_Position1] == "undefined")) { if($("Position1")) { $("Position1").hide(); } } //Search This Blog Search Previous Post Do Small Businesses Create Jobs? Next Post Income of Rulers vs. the RuledFollow This BlogTwitterRSS /**/// if ((typeof adxpos_XXL == "undefined") || (typeof adxads[adxpos_XXL] == "undefined")) { if($("XXL")) { $("XXL").hide(); } } // In order to view this feature, you must download the latest version of flash player here.var so = new SWFObject("http://graphics8.nytimes.com/packages/flash/business/20090302-econ-indicators-graphic/econIndicators.swf","nytSWF", 334,290,9,"#FFFFFF"); so.addParam("allowScriptAccess","always"); so.addParam("allowFullScreen","true"); so.addParam("BASE","http://graphics8.nytimes.com/packages/flash/business/20090302-econ-indicators-graphic/"); so.addVariable("allowCaching",true); so.write("embed70");#embed70{visibility:visible !important;}h2.multiHeadline {font-size:156% !important;padding:0px 0px 7px !important;margin:6px 6px 11px 3px !important;border-bottom:1px solid #CCCCCC !important;} /**/// if ((typeof adxpos_MiddleRight == "undefined") || (typeof adxads[adxpos_MiddleRight] == "undefined")) { if($("MiddleRight")) { $("MiddleRight").hide(); } } //EconomixThe latest from Times reporters and editors. /**/// if ((typeof adxpos_Spon3 == "undefined") || (typeof adxads[adxpos_Spon3] == "undefined")) { if($("Spon3")) { $("Spon3").hide(); } } // Loading Twitter messages...// var twitterReaderVar={widget_id:"4",sidebar_id:"sidebar-2",widget_name:"nyt-twitter",avatar:"show"};if(typeof twitterReader=="undefined"){twitterReader=new Array()}twitterReader.push(twitterReaderVar); //Featured Margaret Atwood and Tax ReformTo effect change in how the nation’s tackles its deficit and overhauls its tax code, we need leaders willing to take on the powerful lobbies of interest groups and industries, an economist writes.
Do Small Businesses Create Jobs?A proposal to cut taxes for small businesses would largely benefit the well-off and would do little to create jobs, an econ
Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
Writing recently in The Financial Times, the renowned novelist Margaret Atwood nailed the lasting effects of the recent "“ and some would say continuing "“ global financial crisis. "Those at the top were irresponsible and greedy," she wrote; consequently and with good reason, very few people now trust our banking elite or the system they operate.
Today's Economist
Perspectives from expert contributors.
Even Camden R. Fine, president of Independent Community Bankers of America, is now calling for the country's largest banks to be broken up.
But the distrust goes deeper and further, just as Ms. Atwood implies. Many people understand perfectly well that the government let the bankers take excessive risk. There was a high degree of group think among prominent officials in the United States and top banking executives in the run-up to the crisis of 2008. As chief economist at the International Monetary Fund from March 2007 through August 2008, I observed some of this firsthand.
And politicians are also tarnished. They appointed the officials who failed to regulate effectively. And in 2007-8 the politicians decided to save the big banks "“ and most of their managers, boards and shareholders "“ both under President George W. Bush and under President Obama. Now attention turns toward the federal government’s fiscal problems, including the complicated mess that is our tax system. Politicians say they want "tax reform," but can you trust them to do this in a responsible manner, without falling captive to particular special interests or to otherwise undermine the general social interest?
The latest indications from Mitt Romney are not encouraging. Mr. Romney is proposing a tax overhaul that he says would be revenue neutral. But his actual plans amount to cutting tax rates, particularly for high-income people, while not closing enough loopholes to make any difference (see this assessment by my colleague and co-author James Kwak, or this take by Matthew O'Brien of The Atlantic).
At the same time, President Obama is focused on increasing taxes for relatively well-off Americans. Mr. Obama wants to make the Bush-era tax cuts permanent for people earning less than $250,000, while not extending them for people with income above that level. What exactly will control the trajectory of deficits and debt in that scenario?
Perhaps we should trust our politicians to control future health-care spending, even though none of them can specify exactly how this should be done. But what is really likely to happen given that health-care providers "“ hospitals and doctors — are a powerful lobby, while insurance companies may be even stronger?
All significant loopholes, including the tax exemption of employer-provided health benefits and the tax deductibility of mortgage interest payments, will be defended fiercely by powerful special interests.
Top military officials seem willing to curtail spending, but members of Congress frequently resist base closings and the cancellation of weapons programs. President Eisenhower famously warned against the military-industrial complex; perhaps we should update that to acknowledge that it's the industrial-political complex that's the danger.
The financial crisis blew a giant hole in our budget and, with good reason, greatly undermined confidence in our political elite. Gridlock in Washington has reached a new peak "“ President Obama proposed the Buffett Rule, which would have raised a very small amount of additional revenue by creating a minimum tax rate of 30 percent on all income over $1 million, and the Republicans immediately blocked consideration of it in the Senate.
Most of what poses as "tax reform" in Washington today is actually tax reduction. With our public finances in their current state, this is the last thing we need. The idea that reducing taxes "pays for itself" through higher growth is just wishful thinking; in our new book, James Kwak and I debunk this in part by citing the research of Greg Mankiw, former chairman of the Council of Economic Advisers under George W. Bush and a key adviser to Mr. Romney.
Yet Mr. Romney and Mr. Obama are likely to compete in November partly on the basis of their tax-reduction proposals.
May we hope that there are ways to bring our national debt under control? Prospects are not so gloomy, for two reasons.
First, if true gridlock prevails, the Bush-era tax cuts will expire at the end of this year. Whatever happens in the November general election, the Democrats and the Republicans would need to agree in order for these tax cuts to be extended. It is quite possible that this will not happen.
That's a big fiscal adjustment, to be sure. But it could well be buffered by a temporary payroll tax cut, linked to employment relative to population. As employment recovers, the payroll tax cut would fade away.
Second, one day soon the private sector will wake up to the fact that rising health-care costs are undermining the American economy, and making it much harder to earn a profit.
With money-driven politics, the only way to fight a lobby is with a bigger lobby. American businesses are typically reluctant to trespass into someone else's sector. But they will do it when their own bottom line is at stake "“ as, for example, when they resist various forms of protectionism.
Health-care costs are not under control; we pay more for the same or less-good services over time; this is like the worst kind of taxation. In 20 years, the adverse impact of health-care costs of businesses will be much worse than any negative effects of taxes.
But don't wait for the politicians to take this on. The problem is far too important and that route will take too long. Talk instead to private-sector executives and entrepreneurs. Persuade them that health-care costs need to be brought under control, and force them to think about how they can push the health-care industry in this direction.
Don't leave banking regulation to be decided by the banks. And don't let the health-care industry control the discussion on what needs to be changed in cost of the delivering medical services.
Mr. Fine is now willing to take on the big banks; he should be commended and supported more broadly on this basis. By working on this issue at the highest political level, he can help restore grassroots confidence in community banking.
Who within the private sector is willing to take on the health-care lobby? Who will take the lead on restoring trust in our market-based economy more broadly?
To effect change in how the nation’s tackles its deficit and overhauls its tax code, we need leaders willing to take on the powerful lobbies of interest groups and industries, an economist writes.
A proposal to cut taxes for small businesses would largely benefit the well-off and would do little to create jobs, an economist writes.
Men’s and women’s attitudes diverge on a number of policy and political issues, and as Mitt Romney has courted social conservatives that gap has become more apparent, an economist writes.
Some Republicans have indeed put forward some serious alternatives to President Obama’s plans for health care reform, though it is not clear if or how well they might work, an economist writes.
Banks’ out-of-control risk-taking and the government’s failure to rein them in created many problems, which critics of government spending are now using as an excuse to attack Medicare, an economist writes.
Floyd Norris, the chief financial correspondent of The New York Times and The International Herald Tribune, covers the world of finance and economics.
Catherine Rampell is an economics reporter for The New York Times.
Binyamin Appelbaum covers business and economic topics for the Washington bureau of The New York Times.
Annie Lowrey covers economic policy for the Washington bureau of The New York Times.
Motoko Rich is an economics reporter for The New York Times.
Each day, Economix offers perspectives from expert contributors.
Economics doesn't have to be complicated. It is the study of our lives "” our jobs, our homes, our families and the little decisions we face every day. Here at Economix, journalists and economists analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.
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