Not the wolf at the door but the termites in the walls

Holman Jenkins, today in Halfway Through a Hail Mary (WSJ):

Instead of arguing over deficit spending, how much better if the G-20 governments had left Toronto pledging flatter tax systems? Tax codes everywhere are full of mountains and valleys and shifting loopholes that distort investment, reward gaming, and discourage saving. After reform, rates may be lower but revenues higher. Is it a tax cut or tax hike? Who cares?

Likewise, what if the G-20 members had credibly committed to raise the retirement age and shift the co-insurance rate (out-of-pocket share) of their health-care spending under their social security programs? Cutting retirement subsidies might be advertised as “austerity,” but middle-aged and younger workers are kidding themselves now to imagine their promised benefits were worth the paper they’re written on. Expecting to work longer for a retirement that is actually secure rather than chimericalis this “austerity” or a reason to celebrate?

All this applies to the U.S. too, fig-leafed by the ease with which Washington currently can finance its deficits in a world where investors are seeking the relative safety of the dollar. That won’t last. Right now, America seems poised somewhere along the transition from debt deflation to stagflation, which historians may one day collectively call the “Obama Depression.”

To change our fate, the best possible solution is real reform that improves incentives and inspires confidence—worlds different from today’s sterile debate about whether a conspicuous short-term deficit encourages or inhibits recovery. Fed Governor Kevin Warsh put it nicely in a speech in Atlanta this week, when he cited veteran Washington economist Charles Schulze to the effect that “it is not the wolf at the door but the termites in the walls that require attention.”

Tackle the termites and jobs and growth will return.

Also in today’s WSJ, Allan Meltzer explains why uncertainty about future taxes and regulation is enemy No.1 of economic growth.

Mr. Obama has denied the cost burden on business from his health-care program, but business is aware that it is likely to be large. How large? That’s part of the uncertainty that employers face if they hire additional labor.

The president asks for cap and trade. That’s more cost and more uncertainty. Who will be forced to pay? What will it do to costs here compared to foreign producers? We should not expect businesses to invest in new, export-led growth when uncertainty about future costs is so large.

Then there is Medicaid, the medical program for those with lower incomes. In the past, states paid about half of the cost, and they are responsible for 20% of the additional cost imposed by the program’s expansion. But almost all the states must balance their budgets, and the new Medicaid spending mandated by ObamaCare comes at a time when states face large deficits and even larger unfunded liabilities for pensions. All this only adds to uncertainty about taxes and spending.

Other aspects of the Obama economic program are equally problematic. The auto bailouts ran roughshod over the rule of law. Chrysler bondholders were given short shrift in order to benefit the auto workers union. By weakening the rule of law, the president opened the way to great mischief and increased investors’ and producers’ uncertainty. That’s not the way to get more investment and employment.

Almost daily, Mr. Obama uses his rhetorical skill to castigate businessmen who have the audacity to hope for profitable opportunities. No president since Franklin Roosevelt has taken that route. President Roosevelt slowed recovery in 1938-40 until the war by creating uncertainty about his objectives. It was harmful then, and it’s harmful now.

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