The largest single economic problem the U.S. faces is the destruction of the tax base as a result of the financial crisis and subsequent unemployment.  In my column today for The Daily, I cite a 2010 study by the Center On Budget and Policy Priorities as arguing that the costs in unemployment benefits and lost tax revenues topped $400 billion in 2009 and and then again 2010 and haven't abated much since.  I don't actually believe that there's a tax you can raise or a program you can cut that will bring the budget into balance when you have 9% unemployment and stagnant or falling wages.

I also don't believe one tiny bit that balancing the budget will create any jobs.  The "confidence" argument just doesn't strike me as how people make business decisions.  It rests on the assumption that an unbalanced budget now means higher taxes later, so you should give up the chance to make a dollar now.  That makes no sense.  I think most people assume that they have no idea what taxes will be like in 10 years.  But if you were absolutely convinced that, because of mounting debts, taxes were going to be raised to onerous levels, you should respond by making every dime you can now and then being retired off shore in 10 years.  That would at least be rational.

The other argument is that government spending "crowds out the private sector."  This can happen when the providers of credit decide to spend all of their capital lending to the government, which has numerous ways to guarantee its debt that private borrowers don't have.  But we know that bond issuances by businesses, including high yield bonds, have been way up.  The corporate bank loan market is also exploding with banks actually loosening standards for making large, syndicated business loans that they can then sell to a growing number of mutual funds and investment funds.  If anything, there's a credit bubble just starting in that sector.  The only place we're seeing tight credit is in small business loans -- the ones that are too small for the banks to sell.  In that case, banks aren't not lending because they want to buy Treasuries, they're not lending because they don't want to keep the loans on their books.  But even that's changing.  In the last Federal Reserve survey of senior loan officers, most large banks admitted they were now loosening standards for credit card loans and the like -- the very types of loans that many small businesses use.  By the way, as a funny aside, conservative commentators and Meredith Whitney assured us that the credit card market would dry up if the government required banks to do things like explicitly state terms and abide my minimal consumer protection disclosures.  Guess the need to, you know, make money trumps that!

So back to my headline -- I think Obama has it about right on the Bush era tax rates.  He should support their expiration when the extension runs out in 2013.  It would be ideal if they expired not on some random date but when unemployment reaches some acceptable number (say 5%).  But that's not going to happen.

It'll be interesting to see if, given the apparent Republican cave yesterday, the President still wants to pursue budget cuts.  Were he to pursue cutting unemployment in half at all costs he'd probably do a lot more for the economy in the long run.  But I don't see an about face on the horizon, nor do I see the Republicans acquiescing to that in the slightest.

I guess now Obama has a choice between pursuing the cuts he put on the table and letting the economy muddle along.  I'll take "muddle along" as the best option if we're down to just that.