One Man’s Ceiling is Another Man’s Floor — 18 July 2011

The deadline for the debt ceiling negotiations is fast approaching, and little in the way of legislation appears on offer.  Much has been written, blogged, and pontificated about this political wrestling match, and I thought it might be useful to return to a few basic facts to put the dispute in perspective.

First, let’s not forget that no matter how big or small any ultimate deal is (and I am confident that a deal will be reached at precisely the 11th hour, fifty-ninth minute), it will only be a temporary stopgap.  They are talking about deals to raise the debt ceiling by up to two trillion dollars – yet the annual deficit is over a trillion dollars.  So in another couple of years we’ll be back at this, over and over again until we stop spending more than we take in.

Let’s also remember that federal law requires that the government enact budget legislation according to a specific timetable, which this Administration has ignored for two years.  If an actual budget were on the table instead of airy projections and numbers, there would be something around which to negotiate in public.  One of the frustrations of this agonizing process is that the White House has offered nothing concrete to serve as a basis for discussions.

But at the end of the day, this is about three things: spending, taxes, and politics.

Much of the air coming out of Washington focuses on the threat of future deficits arising from spending on entitlement programs that will rapidly go into deep deficit as the Baby Boom matures.  But the current $1.4 trillion deficit for fiscal 2011 owes little to growing entitlements – it is mostly a function of the spending hemorrhage that President Obama introduced over the last 2 1/2 years: annual federal spending grew by half a trillion dollars between the 2008 and 2010 fiscal years.

Democrats are resisting cutting this spending, convinced (and I believe honestly so) that that government largesse is helping to keep the economy afloat.  There is, however, ample evidence that government spending can be wasted with no job creation.  Going further, Nobel laureate Robert Lucas in a recent lecture at the University of Washington suggests that our heightened spending promises to put the country on a path of reduced productivity growth similar to that which led Europe to fall behind the US by 20 to 40% in income level over the last forty years.  If that is the case, we will never get ahead of our debt, and we will end up like Greece.

Rather than being the Atlas holding up the shaky economy, government spending is more likely to be the leech that steadily saps its vitality.

As to taxes, let’s not lose sight of the fact that current arguments are focused on improving the current baseline, in which all the Bush tax cuts expire at the end of 2012.  So we’ve already got a big tax hike – big enough to cause a near funding crisis last December – baked into the cake.  The GOP doubtless plans to attack those down the road rather than mix it up in the current tussle.  But it underscores their resistance to Obama’s call for “shared sacrifice.”

It is a refrain we hear frequently from this president, that “those who have benefited so much should contribute a little more.”  This despite the fact that the top 1% of earners in the US pay more in income tax than the bottom 95% put together.  And, according to the OECD, the wealthy pay a greater share of income tax in the US than in any other developed country, and far in excess of their share of income.

It is patently obvious that there is not enough tax revenue to be raised from the wealthy to make much of a dent in the deficits we are facing, even if it were not the case that higher taxes – particularly on those most likely to create jobs – will slow the economy more than it already is.  This is a dead end, and Obama knows it.  He covets those incomes for purposes of “fairness.”

But there are lots of ways to raise revenue without raising tax rates.  A big tax reform would raise more money by broadening the tax base – a major simplification would give the economy a refund of hundreds of billions just by reducing the money currently wasted complying with a 70,000 page tax code.

That’s a bridge too far for the current fight.  But one could raise billions by more intelligent management of federal resources.  Expansion of drilling rights would generate millions in licensing and fees, not to mention the beneficial effect on our energy economy.  There are millions of acres currently held by the government that could be auctioned off to raise billions.

There are revenues to raise that Republicans would applaud.  Most of them are in areas the White House won’t touch.

So let’s touch on the politics of all this.  It all hinges on two fundamental questions – first, can Obama persuade the general public that he is the grownup trying to herd a pack of adolescent cats, and second, will the spending revolt embodied by the Tea Party activists continue to capture the nation’s zeitgeist.

Obama has a persuasive case to make that Republicans are frustrating his attempts at fairness, regardless of how true it is.  The counterweight is the Castor Oil message of the spending scolds – that spending is the problem, that tax increases will only make things worse, and that, like it or not, the benefits so many millions get from the government are just not affordable.

The GOP – and particularly the Tea Party freshmen – run the risk of a Gingrich moment, if they insist on purity instead of legislation.  I am not terribly concerned that a GOP revolt will scotch a deal to advance the debt ceiling.  But I am concerned that the consequences of such a deal for party cohesion could lead to a schism, possibly a third party candidacy, which would result in another four years of Obama.

Republicans need to remember that the election that counts is 2012, not 2010.

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