The issue for this week is tax policy. This issue is needlessly complicated, and accurate analysis, like education policy, requires a series of articles. In Part I, I discussed the crowding out effect which explains the danger of unguarded deficits. In Part II, I explained the effect of spending on local projects which have no national significance (pork-barrell spending). Part III focused on some of the taxes debated, and where the candidates stand. Finally, Part IV will explain the different alleged effects of these positions.
Given all that I have discussed already, what's really going to happen?
I mentioned the Tax Policy Center (TPC) earlier, it's a left leaning group sponsored by the Brookings Institute and Urban Institute. Here is what they have to say:
Obama’s generosity comes at a price, however, He’d raise the national debt by a staggering $3.3 trillion over the next decade, and that includes more than $900 billion in promised revenue raisers that TPC could not verify.
McCain would also go deeper into the red than Obama. Including interest, he’d increase the national debt by $4.5 trillion over a decade. To what I suppose is his credit, McCain only includes about $365 billion in unspecified revenue raisers in his plan compared with Obama’s $900 billion. Let’s just say both have wills far bigger than their wallets.
So, what is the effect of $3.3T to $4.5T in debt?
Inflation
USA Today noted nearly a year ago that:
Financial firms with exposure to the collapsing U.S. sub-prime mortgage market – loans to borrowers with weak credit histories – have found it difficult to borrow or trade in world money markets.
FX Street.com adds
In an attempt at trying to estimate the current value of off the book contracts based on crude oil could amount to more than $4 trillions, which suggests that central banks have already been active in the crude oil market.
Even the Christian Science Monitor is sounding off on the money supply issue:
One obvious step that could help tame oil prices is for central banks around the world to raise interest rates. That could squeeze out the excess money supply that typically fuels the inflation of consumer prices.But it's not clear how fast such moves will occur. Some central banks (including America's Federal Reserve) are also worried about a slowdown in economic growth – which typically calls for cutting rather than raising interest rates.
For months, in fact, some economists have been predicting that a US-led economic slowdown will reduce worldwide demand for oil and that prices will fall.
Part of that scenario has come to pass: Global demand is rising much slower than expected this year. But so far it hasn't pushed oil prices down.
This is taking the view that the crowding out effect can occur because so much credit is needed on such a massive scale, which may not be readily available due to the massively increased borrowing by the Federal Government. This will cause bubbles to appear in commodity markets. Presently this is happening in oil and food. So, one consequence is considerable inflation. This undermines the Ricordian Equivalnce by using money markets to create a credit demand which is not a market demand that further causes considerable strain on market prices.
Regional disruption
Once we realize that a release on credit markets is the only way to remove artificial demand on projects those 11,000+ earmark projects will certainly be abandoned in favor of being able to support seniors and single moms with entitlement programs.
Earmarks in many cases are the only thing that keeps certain communities afloat as John McCain's staff has noted:
To solve the current crisis, John McCain would shore up the foundations of the companies, growth enterprises and family businesses that are the source of jobs for our nation's workers. Spending by households and businesses is slowing, leading to job losses. Looming over daily market volatility, the mortgage crisis and the widespread credit crunch is the specter of inflation, especially in gasoline and food prices. To address these challenges, McCain would combine immediate help with reforms that ensure that American families will be protected from such threats in the future.No government program is a substitute for a good job, and fast job growth requires easing employers' burdens. The most obvious cost is taxes; McCain would oppose Democrats' plans to impose damaging tax increases. He would improve our international competitiveness with a tax credit for research and development, investment incentives and a lower corporate tax rate.
However, it would take substantial spending cuts to reach that ideal. More than merely cutting earmarks. Interestingly, Wall Street thinks it would be easier to grow out of the the McCain deficit than the Obama deficit.
"My personal opinion is I would argue that McCain is probably the better candidate for the economy and that is more or less because of his tax policies," James Caron, head of global rates research at investment bank Morgan Stanley in New York, said at the Reuters Summit this week."In this environment that we're in right now, the last thing you want to have is higher taxes and taking money out of the consumers' pockets," he added.
David Bianco, chief U.S. strategist at UBS Investment Research, told the summit that Wall Street would welcome McCain with open arms. "My view is that McCain is better for the market," Bianco said.
"The market will respond to McCain corporate tax cuts," said participant Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.
The structure of the McCain income distrbution leaves more room for capital investment that would keep interest rates low and make money available to the markets.