Deficits

1. A Grand Bargain

 

On Dec. 3, 2010 the president’s Simpson-Bowles deficit reduction commission failed to approve its own proposal. The proposal combined tax base broadening and rate reductions like the 1986 Reagan tax cut. It proposed entitlement reforms. There was plenty for both parties not to like in the proposal.  Democrats and Senate Republicans agreed to compromise, saying at some point “we need to govern”.

 

House Republicans killed Simpson-Bowles, stating they couldn’t support something that left the Affordable Care Act in tact.  In the 3 years since then we have endured 2 fiscal cliffs and 2 government shutdowns – plainly, damaging our economic recovery.  How much further down the road to economic recovery would we be now if House Republicans had accepted some common ground then?

 

Simpson-Bowles contained $2 of spending cuts for every $1 of added revenue.  It projected spending and taxation to be 21% of GDP by 2020.  It was scored to reach a 2.5% annual deficit to GDP by 2020 which would be the 4th lowest among developed countries.  The proposal was even framed as just a “starting point”.  Where did House Republicans think they were going to get a better deal?

 

We are still searching for a “Grand Bargain” to start reducing our deficits and stimulate economic growth.  I want to work with both parties for a Grand Bargain.

 

2. Increase Taxes/Cut Spending  -  BOTH/AND

 

Every financial planner, accountant, or business person I have heard talk about our deficits takes for granted that we need both tax increases and spending cuts to lower our deficits.  It is so self evident, it is dumbfounding that some elected representatives talk like there is another option.  To be sure, both parties count on economic growth to help push down deficits.  However, number crunchers quote unattainable growth rates that would be required to solve our deficits by growth alone.  And besides, politically, we will never make any progress unless we do both.  Let’s accept it.  We are going to do both.  (The whole Grover Norquist pledge issue has to be referenced here.  Click on Norquist Pledge under Issues.)

 

The widely accepted framework for addressing the deficit has been laid out in Simpson-Bowles: broaden the tax base, lower tax rates while being net revenue positive, reform entitlements, cut spending – and cut spending more than increase revenues.  I support the current Max Baucus D-MT/Dave Camp R-MI negotiations (Max Baucus soon to be replaced by Ron Wyden D-OR).

 

A couple specifics short of a more comprehensive Grand Bargain:  1.  The top tax bracket added in the last fiscal cliff resolution (or the one Bush tax cut not renewed) is an appropriate increase for revenue.  2.  The sequester cuts that congress has partially restored were not an unmanageable reduction in spending.  They were inefficient and onerous because they were across the board and not appropriately targeted.

3. Defense Spending

 

In our effort to cut government spending, the most productive places to look are where the most spending is. Those places are Medicare, Medicaid, Social Security, and defense.  Nearly one half of our discretionary spending goes to defense spending.  Anyone who is serious about reducing our deficits is serious about reducing defense spending.

 

Both democrats and republicans have their own lists of defense department waste.  Even John McCain has a long list of defense department waste he has been unable to do away with.  DOD bureaucracy is near the top of the lists.  More than half of active duty servicemen and women serve in offices and staffs.  Regarding weapons systems, the average time for all weapons procured by DOD is 22 years.  The F-35B  fighter is double its projected cost and rising (400 M ea.).  The Pentagon kept buying C-17 cargo planes until this year even though 5 secretaries of defense had said they didn’t want anymore.   The Air Force is currently buying C-27J cargo planes and simply mothballing them in the desert.  The DOD maintains more military bases than militarily justified.  But congressmen protect bases in their districts from closure by the Pentagon.

 

The U.S. spends as much on defense as the next nine highest defense spending countries in the world combined.

Every student in Econ 101 is presented with the guns or butter curve.  Every dollar you spend for guns is a dollar you can’t use somewhere else. Most people resolutely declare they want a strong military. Whatever that has meant in the past, those dollars are no longer an affordable military today. We need a new military paradigm.

 

4. The Deficit and War

 

In March of 2003 U.S. armed forces began military operations in Iraq.  Two months later the Republican Congress prepared to vote on an important tax measure.  Was it a tax increase to support the war, or an excise tax intended to sunset once hostilities ended?  No.  It was a tax cut, … a tax cut.

 

In terms of inflation adjusted dollars, the Iraq was the second costliest war in U.S. history: $823 billion in direct spending; in addition, $200 billion in interest to date on that debt, perhaps, $1 trillion over the next 40 years for those veterans’ health care and disability (both wars).

 

Some servicemen and women who have come home from active duty have commented that much of the country doesn’t seem very tuned in to their country’s involvement in Iraq and Afghanistan.  Maybe part of the reason is that it didn’t cost us anything. ( ….soldiers and their families, yes, our children, yes, but not us.  We got a tax break.)  Enacting a new health program with absolutely no designated funding source is one thing, but going to war without lifting a financial finger to pay for it is in a class of its own.