Spotlight G-20: A Post Mortem

Another in the Triple Crisis Blog’s series, Spotlight G-20, which has featured posts by a wide range of analysts, including Gerald Epstein, Stephany Griffith-Jones, Martin Khor, Jane D’Arista, and Ilene Grabel and Ha-Joon Chang and stimulated responses from Paul Krugman among others.

The failure of the G-20 foreclosed the export-led recovery scenario. Geithner’s proposal to limit imbalances to 4% of GDP and to force the appreciation of the currencies of the surplus countries, went nowhere as expected. So we are back to the domestic economy. Paul Krugman argued provocatively in one of his last posts that to solve the ‘deficit problem’ we should rely on death panels and sales taxes.

By that he means simply that health costs will have to be reduced and that tax revenues will have to increase, and Value Added Taxes (VAT) would be the best solution. He also notes that the well-known health and tax specialist Henry Aaron defends a similar plan to reduce the deficit. These views would also be an antidote to the president’s deficit commission plan.

On one point we all agree– we will need to control health costs– and the absence of a public option in the health bill will make that very difficult. However, on the need to solve the deficit problem by increasing taxes and using for that a sales tax it is harder to agree. For starters the VAT is highly regressive, and the US can hardly afford to make its tax system more regressive. If anything there would a case for reducing sales taxes on the goods and services consumed by the poor, and several states, in fact, provide those exemptions for food, clothing and medications.

If there were a reason for Obama not to compromise on the extension of Bush’s tax cuts for the wealthiest 2% it would be to provide a moderate increase in revenues in a progressive way. Obviously that would not be sufficient to solve the ‘deficit problem,’ but there again it is unlikely that any type of increase in taxes would lead to a resolution of the problem.

It is the other way round, the solution of the crisis, and the recovery of healthy growth rates would lead to a solution of the accumulating deficits, and the debt. If history is a guide, the incredibly high deficits of World War II and the debt-to-GDP of more than 120% were reduced by a growing economy. In all fairness deficits per se are not a problem, even though one may and should complain of the reasons why we got these deficits (wars with shady justifications, tax cuts for the rich, and a recession caused by excessive deregulation).

Unemployment is the problem, as noted by Robert Kuttner, and deficits are the solution. It is far from clear whether or how the Obama administration would fight for a more expansionist fiscal stance. Now only the domestic avenue is open for recovery, and rather than increase sales taxes to solve the deficit problem, a better solution would be to provide financial help to people losing their houses. Death panels and mortgage relief is a better strategy. At least on that front one would hope Obama and congressional democrats could put up a fight.