Tax cuts, false premises and the New York Times
The New York Times, in yet another editorial bemoaning the current state of affairs, makes a somewhat common mistake (for the Times) of using a false premise to build an argument.
The United States' gap in trade and other international transactions is on track to reach an unprecedented $788 billion in 2005. The federal budget deficit, meanwhile, remains intractable.
The fact is that the federal budget deficit is much smaller than forecast, and is pretty low by historic standards.
However, since the Times has started out with a false premise, they are confused by some "contradictory" facts:
Normally, that would make investors wary of holding dollars. But the dollar, which had been in a long swoon, has unexpectedly recovered in the second half of this year.
Now, instead of instituting a sanity check and thinking that perhaps, just maybe, their original contention that deficits are "intractable" was false, they conclude that the strengthening of the dollar is "unexpected".
The editorial continues on, pursuing the illogical stance to some additional illogical conclusions:
That is good news for the "deficits don't matter" crowd in the White House and Congress. For them, the stronger dollar is evidence, of sorts, that the country can run outsize deficits without suffering their worst effects, namely, sharply higher interest rates, unrelenting downward pressure on its currency and a drop in living standards.
Here the Times is deliberating confusing a policy where economic growth counters deficits with one where "deficits don't matter", as if the administration simply doesn't care about them. The intent is obvious: the Times wishes to portray the President as out of touch and uncaring. (So what else is new at the Times?)
The Times has a couple of handy excuses for why the administration has been so lucky as to avoid a horrible, horrible economic fate. First, evil corporations are shifting their huge piles of cash around:
But the dollar's upswing will not last forever. This year, the dollar has been juiced partly by American companies' repatriation of hundreds of billions of dollars from abroad. That will end soon because the money has flowed home to qualify for a one-time tax discount, valid only in 2005.
Secondly, foreign investors are being duped by "high" interest rates:
More significantly, the dollar has been buoyed recently by a surge of foreign investment in the United States. Lured by interest rates that are higher than elsewhere in the developed world, foreign investors - mainly Asian central banks and offshore hedge funds - have snapped up more than enough Treasury notes and other American assets to finance our widening deficits.
The Times seems to forget that it is the strength and stability of the dollar that lures foreign investment. The United States has always been a haven for foreign money that wishes to remain safe from turmoil and quickly changing exchange rates. Even when rates were at forty-year lows and the deficits higher, foreign funds continued to flow to the United States.
What the Times is setting up is the invalid conclusion that lower taxes are the root of all evil, and the administration could avoid a plethora of economic ills if they would simply increase taxes.
The Times, as usual, has it completely backwards. It is tax cuts that have fueled the expansion, which has resulted in higher revenues and lower deficits. This has helped strengthen the dollar.
To follow the Times' advice is to turn your back on fact and logic and invest our future in magic beans.
No thanks, I'll take 25 years of facts that demonstrate lower tax economies lead to unprecedented economic growth.
The United States' gap in trade and other international transactions is on track to reach an unprecedented $788 billion in 2005. The federal budget deficit, meanwhile, remains intractable.
The fact is that the federal budget deficit is much smaller than forecast, and is pretty low by historic standards.
However, since the Times has started out with a false premise, they are confused by some "contradictory" facts:
Normally, that would make investors wary of holding dollars. But the dollar, which had been in a long swoon, has unexpectedly recovered in the second half of this year.
Now, instead of instituting a sanity check and thinking that perhaps, just maybe, their original contention that deficits are "intractable" was false, they conclude that the strengthening of the dollar is "unexpected".
The editorial continues on, pursuing the illogical stance to some additional illogical conclusions:
That is good news for the "deficits don't matter" crowd in the White House and Congress. For them, the stronger dollar is evidence, of sorts, that the country can run outsize deficits without suffering their worst effects, namely, sharply higher interest rates, unrelenting downward pressure on its currency and a drop in living standards.
Here the Times is deliberating confusing a policy where economic growth counters deficits with one where "deficits don't matter", as if the administration simply doesn't care about them. The intent is obvious: the Times wishes to portray the President as out of touch and uncaring. (So what else is new at the Times?)
The Times has a couple of handy excuses for why the administration has been so lucky as to avoid a horrible, horrible economic fate. First, evil corporations are shifting their huge piles of cash around:
But the dollar's upswing will not last forever. This year, the dollar has been juiced partly by American companies' repatriation of hundreds of billions of dollars from abroad. That will end soon because the money has flowed home to qualify for a one-time tax discount, valid only in 2005.
Secondly, foreign investors are being duped by "high" interest rates:
More significantly, the dollar has been buoyed recently by a surge of foreign investment in the United States. Lured by interest rates that are higher than elsewhere in the developed world, foreign investors - mainly Asian central banks and offshore hedge funds - have snapped up more than enough Treasury notes and other American assets to finance our widening deficits.
The Times seems to forget that it is the strength and stability of the dollar that lures foreign investment. The United States has always been a haven for foreign money that wishes to remain safe from turmoil and quickly changing exchange rates. Even when rates were at forty-year lows and the deficits higher, foreign funds continued to flow to the United States.
What the Times is setting up is the invalid conclusion that lower taxes are the root of all evil, and the administration could avoid a plethora of economic ills if they would simply increase taxes.
The Times, as usual, has it completely backwards. It is tax cuts that have fueled the expansion, which has resulted in higher revenues and lower deficits. This has helped strengthen the dollar.
To follow the Times' advice is to turn your back on fact and logic and invest our future in magic beans.
No thanks, I'll take 25 years of facts that demonstrate lower tax economies lead to unprecedented economic growth.