Monday, March 12, 2012

The beast has evolved

Impressive stuff. The Wall Street Journal editorial page dumps the 2012 presidential election campaign prospects and the Starve the Beast theory in one go, the latter being the idea that it's OK for Republican presidents to run up massive deficit-financed tax cuts (even at the expense of claiming that tax cuts will be self-financing) because the debt explosion will force future Democratic presidents to cut government spending. No longer, it seems. Now the debt is so large that precisely when a Republican president could implement the most miraculous growth-enhancing policies, the Fed would have to raise interest rates to stem inflation and the debt service burden would go through the roof:

If the economy gains steam—say, in a new Administration that reforms the tax code, cuts spending and reduces regulation—the Fed may have to raise rates to forestall inflation. But if it raises rates, interest payments on the debt will soar, the deficit may not fall from its Obama trillion-dollar levels, and pressure could build for a tax increase.

President Obama may not mind this outcome but Mitt Romney and Rick Santorum should, which is why they need to talk about this fiscal nitroglycerin that Mr. Obama and Fed Chairman Ben Bernanke have created. The two Republicans might also take a moment to wonder how much they really want this job. The next Presidential term may be spent trying to defuse the Obama debt bomb.

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