According to Bloomberg, Tim Geithner plans to testify in front of Congress next week, hoping to persuade lawmakers that the Bush tax cuts for the rich must expire.Why?
Well, ostensibly it’s about closing America’s monster deficit, but that can’t really be it, as this won’t move the needle much. Only a combination of steep spending cuts (to entitlements, defence, etc.) and a return to robust growth would actually accomplish that.
No, it’s all about appearing to be doing something about the deficit.
Remember, this morning, we told you that the phrase of the day was credible commitment. Tim Geithner thinks he has to make a credible commitment to the Chinese, and whoever else is buying our debt, that we’re doing something about the deficit. No, we’re not going to close it, we just want to do something that’s tough and credible. And, to be fair, hiking taxes on the nation’s most powerful faction does count as being tough.
Now Geithner is a bond salesman in a sense, so he’s gotta do whatever he feels he has to do. But the truth is that there’s just not any risk of us going broke due to the Chinese and our debt. The demand for our debt continues to go in one direction, and it’s obvious that the Fed has plenty of spare firepower to sop up however much it wants. In other words, Geithner plans to put on a show, and it’s not even a necessary one.
And then beyond that, it’s bad policy. It’s impossible to imagine this tax hike — especially as it will hit small businesses — being anything but counter-stimulative.