November 24, 2010 12:23 AM UTC

Confronting the Monster - The Economist looks at the US Deficit.

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• by: SSG_Dan

Again, I normally post my own insane rantings on all subjects political, but this week’s issue of The Economist was devoured prior to all other publications here, including the WIRED featuring the Tron:Legacy article.

But I ask all of you that possess critical thinking skills to take an hour to read thru this entire article, and consider the outsiders’ view of the Republican’t Party’s mess regarding the Federal Deficit.

Confronting the monster

At last, plans are appearing to cut America’s deficit. But will politicians and the public embrace them?

BARACK OBAMA and his Republican opponents have spent much of the past month sniping at each other, but on November 15th they suddenly found themselves agreeing. Mitch McConnell, the leader of the Senate Republicans, called for a ban on earmarks, the pet projects politicians like to pop into spending bills. Mr Obama, who also wants a curb on them, quickly applauded.

A cynic would say that such agreement was easy, since the stakes are so low. Earmarks attract plenty of bad press, but the money is trivial-less than 0.5% of federal spending. On the more pressing question of how to close America’s gaping deficits, Democrats and Republicans remain far apart. Only a week before, the chairmen of a bipartisan commission set up by Mr Obama in February to find ways to get the deficit down floated a proposal focused on cutting spending. Republicans liked this, but Nancy Pelosi, the Democrats’ leader in the House of Representatives, called the idea “simply unacceptable”.

This sound and fury, however, may signify something important. The two sides are no longer arguing over whose taxes to cut or which entitlements to expand, but whose taxes will rise and which entitlements will shrink. It may all come to naught; or it may signal the dawn of a new age of austerity, similar to the era of tax increases and entitlement cuts that prevailed from 1982 to 1997.

http://www.economist.com/node/…

(This should be the public link – if it asks for login info, then I’m not sure what to do…)

Money Quote #1:

“America has a good and a bad excuse for its inaction. The good one is that the economy isn’t ready. Economic growth in the second half of this year has been a painful 2% at an annual rate. The unemployment rate, at 9.6%, remains near its peak. The effects of the stimulus are wearing off, so fiscal policy now veers towards contraction. If taxes rise or spending falls immediately, the economy could slide back into recession, as happened in Japan in 1997.”

Money Quote #2 (or, where Repubs decide to blow off “fiscal conservatism” and spend like drunken horny sailors at Subic Bay…)

“A surge in tax revenue, pushed by the stockmarket bubble, then pushed the budget into surplus in 1998, four years ahead of schedule. With that, the culture of austerity died. Congress has regularly overridden the 1997 cuts in Medicare payments. Mr Bush cut taxes on income in 2001 and on capital gains and dividends in 2003. In 2003 he signed into law the first big entitlement in years, the prescription-drug benefit. In 2002 Paygo lapsed. Structural deficits soon re-emerged, but the bond market no longer seemed to care, as long as the global savings glut kept America’s borrowing costs low.”

(Remember that Repubs held the Majority in the House in 1997-2006…)

Money Quote #3 – The Obama record

Almost from his first day in office Mr Obama promised to make “hard choices” on the deficit, and not to saddle America’s children with “a debt they cannot pay”. But his first two years have been firmly giveaway: not because of his $814 billion stimulus plan (an essential, and temporary, response to the crisis), but because he has allowed structural problems to fester. Though Paygo was reinstated this year, it exempted particular things that Mr Obama wanted, including keeping Mr Bush’s tax cuts for 98% of households.

Money Quote #4 – dismantling the Teapublican idea that cutting taxes will fix everything:

A more efficient way to claw back revenue would be reform of the tax system. The system is riddled with so-called “tax expenditures”-credits, exemptions, deductions and other loopholes that cost $1 trillion a year in forgone revenue. Some, like the earned-income tax credit, are closely targeted to the poor. But the rich benefit most, because the value of a tax break-for mortgage interest, employer-provided health insurance and many more-rises with the taxpayer’s tax rate. The lower rate on capital gains and dividends also mostly benefits the rich. Eliminating these breaks would broaden the tax base; it would probably also make it possible to lower marginal rates, even below the levels of Mr Bush’s tax cuts.

Taxes may still have to be raised by other means to get the deficit down. At present, compared with other countries, America taxes income too heavily and consumption too little. A sensible solution would therefore be a value-added tax; every other rich country has one. The Domenici-Rivlin report suggests a 6.5% “debt-reduction sales tax”. A carbon tax, or a higher petrol tax, could play the same role.

And lastly, for ‘tad, Beej and the often-cited H-Man…a purdy picture of the two competing austerity plans put together by the bipartisan commissions requested by the President:

The biggest question on all of this is: Is there enough political will to make the tough choices on the budget, and is there enough brains in the Republican’t Party to pursue the intelligent ones over the simpleton arguments that might get them re-elected.

I’ll give the last quote to the article:

It is true that both Reagan and Mr Clinton were re-elected after pursuing austerity in their first terms. But they were prodded by the bond market: yields were over 10% in 1982 and around 6% in 1993. Now yields are under 3%. Some, including members of Mr Obama’s economic team, think this shows that the market is more worried about deflation than deficits. They note that fiscal tightening in America in 1937 and Japan in 1997 prolonged economic suffering. To counteract this, the Domenici-Rivlin plan includes a $650 billion payroll-tax holiday in 2011.

Mr Domenici would love to see Mr Obama and Congress share the same urgency he felt as he walked into Reagan’s office in 1982. A fan of military metaphors, he calls the current challenge the greatest the country has faced since Pearl Harbour. “America is on the threshold of potential economic devastation,” he says. “The day of infamy is close.” The big difference, however, is that the public doesn’t know it yet. “It’s not like they bombed Hawaii.”

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