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Fareed Zakaria is not a fiscal conservative by any means. His
left leaning bias towards relying on tax increases to fix our deficits,
instead of spending cuts, makes that abundantly clear. On his "What in the World"
segment on Sunday's GPS program, Mr. Zakaria excoriated former Treasury
Secretary Hank Paulson and former Chairman of the Federal Reserve Alan
Greenspan for not asserting that they want taxes to increase in order to
balance the budget--Zakaria's comment was prompted from an interview those
gentlemen conducted the prior week with David Gregory from Meet the Press.
It is true that I've spilled much ink over the mistakes Paulson
and Greenspan have made in the past. The monetary policy stance of Alan
Greenspan in the latter part of his tenure was irresponsible, to put in
kindly and Henry Paulson's belief that we should take on more debt to bail
out our over leveraged condition -- even for a short period of time--was
absurd. But to the credit of both these men, they steadfastly believe that
the nation's most salient issue in the longer term will be the discrepancy
between expenditures and receipts.
Even Fareed assents to the notion that our long term structural
debt and deficits are the most pressing concern that faces America. But he also
said, "The Bush tax cuts are the single largest part of the black hole
that is the Federal budget deficit." How is it that he can know that for
sure? After all, tax cuts create jobs by incentivizing innovation. They
empower individuals and businesses by allowing them to decide what they want
to produce and what they want to consume, rather than some person in
Washington. As a result, the economy and markets function in a more balanced
and efficient manner. The outcome is you end up generating higher growth
rates in GDP and actually increase revenue for the Treasury. The biggest part
of the "black hole" in deficits was not the Bush tax cuts but it
was instead his increased spending on two wars and a new entitlement
program that created the huge red ink. There would be no deficit if
the government learned to spend only what it takes in as revenue. That means
-- brace yourself Keynesians -- a drop in revenue from an economic slowdown
should be met with a commensurate cut in government spending.
However, Zakaria feels that the only viable alternative is to
address the revenue side of the equation. What he fails to recognize is that
raising tax rates or imposing new levies and fees do not always lead to an
increase in revenue. That's because people's behavior changes when you take
more of their money away from them. Failing to recognize this fact is
tantamount to believing that entrepreneurs can always increase their profits
by simply raising the prices of goods they sell. But business owners can't
always boost their bottom line by raising prices because consumers change
their buying habits in reaction to prices. Likewise, the private sector
changes their entrepreneurial strategy (for example whether or not to start
or expand a business) based on the government's portion of their profit.
Therefore, the government cannot always increase revenue by simply raising
taxes.
Fareed further stated that, "...cutting the deficits
without any tax increases would require massive cuts in middle class programs
that would never pass." But I'm not convinced passing new or increased
taxes would be any easier Mr. Zakaria. The republicans usually coalesce very
firmly around the issue of not raising taxes, especially during a recession.
In fact, many republicans and economists correctly believe that raising taxes
would be the worst thing for this economy during a time of crisis. That's why
Messer's Paulson and Greenspan so steadfastly refused to agree that allowing
the Bush tax cuts to expire -- which is a tax increase -- would help reconcile
our budgetary imbalances. They understand that it would not increase anything
accept government's control, power and influence in the affairs of markets;
not necessarily an increase in revenue to the Treasury.
It was also not; as Mr. Zakaria contends political
"pandering" that caused those men to eschew tax increases. It was
instead their innate understanding that we need economic growth along with
spending reductions to rescue the country from the upcoming fiscal disaster.
What we cannot afford to do is discourage economic growth in an attempt to
increase government coffers. Besides, history has clearly proven government
has the proclivity to spend any money it collects and not to pay off debt, so
how can we be sure the revenue from tax increases would be used to reduce
deficits this time around?
What we need to learn as a nation is that taxes need to be made permanently
low in order to incentivize risk taking and promote viable and sustainable
economic growth. Then we must simply accept that government should only spend
what it realizes in revenue. If taxes paid as a percentage of GDP continue to
grow, as Mr. Zakaria espouses, he will get his wish and the U.S. will
resemble Greece in the coming years. Along with that "distinction",
government's involvement in the private sector will also reach a point that
cannot be reversed without catastrophic consequences, if we have not reached
that point already.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A 15-year
industry veteran whose career began as a trader on the floor of the New York
Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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