Wednesday, November 3, 2010

Assume The Position, West Virginia (for publication November 12, 2010)

Get ready. This is going to hurt.

In business there’s an old saying. High quality, great service, low price – pick two . . . because you can't have all three. In economics, there is an equivalent troika. Low taxes, no deficits, high growth. Again, pick two.

In times of economic downturn, you can have low taxes and high growth, but you will necessarily run large deficits. Or you can have low taxes and no deficit, but you will starve the economy of liquidity and choke off growth. Finally, you can have no deficits and high growth, but at least moderate levels of taxation are necessary because, in the end, to use another apt cliché, there’s no free lunch.

But last week we gave control of the House of Representatives to a party that’s largely under the sway of people who believe, along with Herbert Hoover, that there is a free lunch, that we can have all three. And they are determined to resurrect the often failed but zombie-like theory of supply-side economics in the magical belief that all we have to do is get government out of the way and the free market will reward us with pain-free prosperity -- or at least that any pain will be limited to those who deserve it.

The problem is that, if our experience with supply-side tax cuts between 2002 and 2008 is a predictor of the future, those who deserve to suffer pain will be the 90% of US households that have incomes of less than $200,000 a year and whose purchasing power and disposable income actually diminished during this time of supposed prosperity . . . and that was before the economy went off the cliff.

So, we may be getting teed up to be whacked again. And this time, West Virginia is likely to be among the places most badly hurt.

That’s because, to make a significant dent in the federal deficit, never mind eliminate it, the latter day Hooverites will have to cut heavily in areas that are vital to West Virginia's economy.

They will have to go after big budget items such as Social Security, Medicare, and entitlements that are essential to West Virginia in a way they are to no other state. Contrary to what Governor, now Senator-elect, Manchin tells us, the comparative durability of our economy during the recent financial crisis was not due to private enterprise and job growth as much as it was due to the fact that West Virginians derive a greater share of their incomes from entitlements than do the residents of other states. And, while the private sector economy has faltered, entitlements have not. Consequently, West Virginia came through comparatively unscathed.

But, the flip side is that, if Social Security and entitlements are cut, West Virginia will suffer more than other places. Incomes will be reduced in a state that already has the nation’s lowest median income. In short, serious cuts to entitlements would be an Exocet missile aimed at the heart of our economy and should strike fear into the heart of every local politician and merchant.

Is this dire prediction just fear-mongering? No. Look at the numbers the Hooverites will face when they show up with their meat cleavers. Interest on the national debt, which they cannot touch, represents 8% of the federal budget. Defense spending, which they believably say they won’t touch, consumes another 20%. Meanwhile, the deficit they’re trying to eliminate represents 36% of the budget, and that amount is what will have to be taken out of the remaining 72% of the budget since interest on the debt and defense are being held harmless.

In other words, we’re talking about cuts of one half and not just to the National Endowment for the Arts, National Public Radio, and the much maligned Department of Education. We’re talking about major cuts at the Treasury Department, the Justice Department, the Food and Drug Administration, and, yes, Social Security and Medicare – cuts that will make all but the most doctrinaire and extreme libertarians blanche.

But, draconian budget cuts that reduce incomes won’t be West Virginia’s only problem. When cutting taxes, the new Hooverites’ first priority will be to extend the now famous Bush tax cuts which, aside from increasing the deficit, deliver the majority of savings to just the top six percent of income earners, among whom there are few West Virginians.

Again, the numbers tell the story. Because West Virginia incomes are so low, for every dollar the average US household saves as a result of the Bush tax cuts, West Virginia households save only 67 cents. So, regardless of how much stimulative effect the tax cuts have, West Virginia sees less benefit than every other state making us less competitive and less attractive as a place to do business -- another fact that should bewilder local politicians and merchants.

We know the new Hooverites won’t compromise on the Bush tax cuts. And we can only hope that, when they are required to provide specifics on where they will cut the budget and by how much, something they have studiously avoided doing so far, they will flinch. Or, better yet, perhaps the American people will flinch for them. But, regardless, the difference will be one of degree and not direction. And the direction is unmistakably one that will hurt West Virginia. The only question is, how badly?