The Fighting 29th

All about New York's 29th Congressional District

The recent tax vote brought a predictable outcry from Republicans.  Randy Kuhl's blog headline, "AMT - 130 Percent Tax Hike", portrays the pay-as-you-go provisions of the tax bill as an economy-depressing tax hike.  The current Republican position is that an AMT cut is a great thing, but we should just cut it without enacting a corresponding paygo tax increase.

Tax cuts, and damn the consequences, is great sloganeering, but unpleasant fiscal realities are beginning to intrude on this rosy picture.  Here's one:  the dollar is at 50-year lows compared to some other currencies.  Much of the dollar's fall is due to the need for low interest rates to weather the mortgage crisis, but some of it is simply market reaction to the inability of the United States to keep its fiscal house in order.
Here's what the Wall Street Journal says:

To understand the dollar's current woes, you have to look elsewhere -- to monetary policy and economic management. The supply of dollars in the world is ultimately controlled by a single source, the Federal Reserve. With its aggressive easing in September, and again in late October, the Fed has signaled to the world that it cares more about creating dollars in the hope of limiting U.S. credit problems than it does about the dollar's value. Investors can see this, and so they are dumping dollars and looking for other assets to hold.

[...]

Our current financial woes are in large part the result of previous monetary excess, which fueled a debt and asset boom that has become a banking bust. The way to emerge from the mess is to slowly but honestly work off the bad debt and write down the losses. The one sure way to make things worse is with more monetary excess.

When the Journal talks about "monetary excess", they're referring to the insanely low interest rates that were used to stimulate the economy earlier this decade.  Those interest rates fueled the mortgage boom.  As a Nobel-Prize-winning economist put it in this month's Vanity Fair:

[...] the job of economic stimulation fell to the Federal Reserve Board, which stepped on the accelerator in a historically unprecedented way, driving interest rates down to 1 percent. In real terms, taking inflation into account, interest rates actually dropped to negative 2 percent. The predictable result was a consumer spending spree. [...] Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Credit-card debt mounted to a whopping $900 billion by the summer of 2007.

This economist was the head of President Clinton's board of economic advisors, so Republicans might want to be skeptical about his views of the economy.  But it looks to me that he and the Journal are saying the same thing:  lowering interest rates is a trick that isn't going to work much longer. 

So what does this have to do with tax cuts?  Simply this: we must borrow money to finance tax cuts.   And the markets are going to require that we raise interest rates if we want to keep borrowing.  So it will cost a lot more to borrow the money to finance tax cuts in the future.  That old saw, "mortgaging our children's future" takes on new meaning when the mortgage rate keeps going up.

Here's a chilling passage from the Vanity Fair article:

A large portion [of the monetary crisis] will take decades to fix—and that’s assuming the political will to do so exists both in the White House and in Congress. Think of the interest we are paying, year after year, on the almost $4 trillion of increased debt burden—even at 5 percent, that’s an annual payment of $200 billion, two Iraq wars a year forever. Think of the taxes that future governments will have to levy to repay even a fraction of the debt we have accumulated.

Randy Kuhl, and other members of his party, would rather not think about it.  If raising taxes is taboo, what's the alternative?   This is the challenge for Republicans, and all their anti-tax rhetoric isn't going to change the fix we're in.