The next president of the United States, whoever that person will be, will face a significant budget crunch - so significant in fact, that many of the things he promised will have to be forfeited. Why? In addition to the budget deficits from government health care and the the Iraq war that were already adding significantly to the budget deficit the current financial crisis multiplies this for atleast two reasons beyond simply the cost of the bailout.
Megan McArdle at the Atlantic spells them out. First:
Whatever your opinion of the Bush tax cuts, it is indisputable that they made our tax base more progressive: the rich and very rich now pay a higher percentage of the total tax take than they did before Bush took office. That has dire implications for the budget for the next few years.
Especially in recent years, the income of the wealthy has become more volatile than the income of the middle class and below. In good years, their earnings soar, and Uncle Sam reaps more revenue than expected. In bad years–particularly bad years on Wall Street, since most of that money comes in the form of some sort of security, rather than cash–tax revenues nosedive. Incidentally, the more we focus on taxing the rich, the worse this problem will get.
Even without the bailout package, America’s tax revenues are going to look pretty anemic next year. As goes Wall Street, so go income taxes.
I say that not in the “what is good for GM is good for America sense”; it’s just an empirical observation. The Clinton surpluses were entirely capital-gains based. Bush’s happy surprises were buoyed by stock options and executive bonus packages, almost all of which is in stock. So if the stock market is down next year, hello massive deficit.
In other words, this is “trickle down economics” in reverse. The cash cow is severely hurt - not just the people, but the institutions themselves.
Asked what role the credit default swaps play in this financial disaster, [UCSD economist] Frank Partnoy tells [Steve] Kroft, “They were the centerpiece, really. That’s why the banks lost all the money. They lost all the money based on those side bets, based on the mortgages.”
The result is a huge shadow market that may control our financial destiny, and yet the details of these private insurance contracts are hidden from the public, from stockholders and federal regulators. No one knows what they cover, who owns them, and whether or not they have the money to pay them off.
One of the few sources of information is the International Swaps and Derivatives Association (ISDA), a trade organization made up the largest financial institutions in the world. Many of them are the very same companies that created the vast shadow market, lobbied to keep it unregulated, and are now drowning because of unanticipated risks.
ISDA’s CEO, Robert Pickel, says there is nothing wrong with credit default swaps, and that the problem was with underlying mortgage securities.
“It is something that we all need to look at and learn lessons from,” Pickel said blandly to Steve Kroft, as if talking about something no more weighty than improving his golf game. “And we all need to work together to understand that and design a structure in the future that works more effectively.”
“These people understand the nature of these products. They understand the risks,” Pickel said when Kroft challenged him further.
Well if they understood the risks, why, when everything went bad, why do we have to pick up the pieces?
“These are very useful transactions. And the people do understand the nature of the risk that they’re entering into…but I’m not sure that…,” Pickel says.
“Useful?” Kroft interrupts. “How come they brought down the financial system?”
As opposed to the previous quote from Sowell, this quote actually is “interesting”.
It’s a pity that McArdle starts her post by claiming “it is indisputable that the Bush tax cuts made our tax base more progressive”, since that detracts significantly from what she has to say. It is true, as McArdle claims, that a larger portion of the tax base is paid for by the wealthy now than before the Bush tax cuts, but that ignores the facts that a) the wealthy have more wealth to pay taxes on now than they did before, and b) the tax rate cuts themselves were not “progressive” unless one ignores middle class tax rates.
So, McArdle is technically correct about the progressiveness of the “tax base”, a bit deceptive in not mentioning the lack of progressiveness of the Bush tax rates themselves, and dead wrong about the subject of “indisputableness”.
But that was just the sideshow.
Her main thesis, that we are looking at a rough period budget-wise in the near future, and that that rough period will be made even rougher to the down-turn in rich folks’ portfolio’s, I think is absolutely correct. I pity the next President. Thank you Mr. Bush.
So the argument is that the super-rich are overtaxed? These people are evidently like the ancient sage-kings of China who would merely face south and cause the crops to grow, the seasons to change, and the animals to copulate. I just hope we don’t make them angry…