My reactions to President Obama’s proposal for reducing the deficit were very much along the lines of those of the editors of the Washington Post:
The president is right, of course, that credible debt reduction requires a combination of tax increases and spending cuts, and it is unfortunate that Republicans have been unwilling to accept that fact. But a more fundamental sweep through the tangled underbrush of the tax code, as envisioned by the Simpson-Bowles report, would be an even better approach.
The other essential element of credible debt reduction is tackling the biggest driver of long-term deficits — federal health spending, particularly Medicare. Here Mr. Obama backed away from some of the entitlement reforms he entertained in his closed-door discussions with House Speaker John Boehner, including raising the eligibility age for Medicare and changing the way that Social Security benefits are indexed for inflation. Mr. Obama left Social Security entirely out of Monday’s proposal, and his Medicare savings ($248 billion over 10 years) once again primarily target providers. A White House fact sheet on the proposal brags that 90 percent of the savings come from “reducing overpayments†and that changes affecting beneficiaries do not begin until 2017 — after a second Obama term, if he is reelected.
The two point summary is that
- It isn’t big enough.
- It gives every impression of intentionallly DOA, political posturing.
We are presently, this very day, paying in interest on the debt about half of total revenue. In order to stabilize our deficit situation, i.e. merely maintain the debt at its present unacceptably high level, we need to cut about $6 trillion from the budget over ten years, AKA a half trillion per year. As an example of just how laughable the president’s strategy with respect to Medicare is, he’s proposing just over $40 billion a year in cuts from a program that’s growing by double that every year. We need to run twice as fast as that just to stay in the same place.
I’ll have more to say about taxes in a later post.
Keith Hennessey dissects the proposal even farther:
You could be forgiven for thinking that the President is claiming that his new proposals are balanced, and that “the larger plan that’s balanced†is what he has proposed this month, consisting of equal-sized spending cuts and tax increases. That is the incorrect conclusion to which you are led, but technically the President is not claiming that. The “larger plan that’s balanced†is one that includes spending cuts enacted over the past six months. The “among the biggest cuts in spending in our history†are not those newly proposed, but those previously enacted.
They are playing a word game to fool you, and if you listen carefully you’ll hear it repeated over the next few weeks. Team Obama knows they’d never win the public debate if they admitted that the President is now proposing massive tax increases to “balance†previously enacted spending cuts, so they’re engaging in a little misdirection.
In his introductory speech for the proposal the president said “This is not class war, this is math.”. I agree with the former and disagree with the latter.
It’s the assumptions, stupid.
Those assumptions are keeping our economy in the doldrums and pushing us to the verge of insolvency.
“The president is right, of course, that credible debt reduction requires a combination of tax increases and spending cuts, and it is unfortunate that Republicans have been unwilling to accept that fact.”
This is the key. The GOP has clearly said it will not allow an increase in taxes. They could have had the much better deal Obama offered. There is no deal to be had with the GOP. Given that, Obama has now given up his usual tactic of offering a plan that starts somewhere in the middle, like he did with health care. He has offered a politically unacceptable plan to the GOP that will please his base much more. Other than just conceding every GOP point, what other option did he have? Why should he start with another centrist plan to see it rejected? What did Einstein say about insanity?
Steve
Oh, and this Hennessey stuff (common among right wing pundits) about not having real cuts is amusing. Debt, as a percentage of GDP, dropped from over 100% to about 30% prior to 1980. We did that by cutting actual spending in just a few years. We need cuts in projected spending. If he wants to argue for larger cuts, do so. Just knock off this nonsense about “real cuts”.
Steve
I’m with the GOP on this one. I am unwilling to agree with tax increases until Washington proves it is serious about spending reductions. We need to see deep cuts in spending (current, actual spending, not mythical proposed reductions in the rate of growth that will hit some time in the future) before we even discuss tax increases. The history of Washington is to have tax increases now balanced with spending cuts some time in the future which never actually happen because a future Congress is not bound by today’s deal. Let’s see the cuts first. Let them take effect now. Give us a few years of reduced spending (less spending than the year before, not a reduction in the rate of increase), then talk to us about more taxes.
Those assumptions are keeping our economy in the doldrums and pushing us to the verge of insolvency.
If you’re on the verge of insolvency, you’re insolvent.
“If you’re on the verge of insolvency, you’re insolvent.”
That’s a very interesting pickup, icepick. If you ever serve on a board as a director (of a public or private corporation at least) you will know that this is crucial, because as a board member if you become insolvent you may be personally liable for payroll taxes should the corporation not be able to pay them.
This was relevant in an earlier Dave post where he was lamenting “kicking the can down the road” while the government was in essence insolvent. Think about it.
Think about it.
I do. Not that it does me any good of course. But then nothing ever does.
Dave,
If you get a chance, I’d be interested to read your reaction to this presentation that has been making the rounds with some of the econbloggers:
http://graphics8.nytimes.com/packages/pdf/opinion/oped/econtrarian_090711.pdf
It’s an interesting presentation. My hipshot observation is that it supports a number of the points I’ve made around here.
I think there’s one important thing that it misses: that what we’re seeing is a long term structural problem that has been papered over by two consecutive bubbles.
I also think there are several points that the presentation probably should make that it rather puzzlingly doesn’t:
– banks already have as many home mortgage loans as they want
– banks are being incentivized not to lend
It’s probably worth a post.
Groovy.
I certainly agree about the long-term structural problem. The presentation makes in my view a strong case for more near-term quantitative easing, which I know you’ve expressed some skepticism about.
Having mediocre knowledge of macroeconomics but a strong distrust of the federal-financial sector, my own instincts are against more QE. That said, I’ve been reading Scott Sumner lately and between him and Kasriel’s presentation, have been reconsidering my opinion.
The concern I have about QE is largely a question of assumptions. Let’s make the following assumptions:
– QE produces inflation (the presentation says as much). That dilutes savings and reduces the purchasing power of people who are on fixed incomes, the poor, elderly, etc.
– growth resumes at its historical levels–3%. That does very little to make investing in the U. S. attractive.
– Very few of the unemployed get re-hired
– Large corporations invest overseas
– bankers, bondholders, etc. do just fine
Why should most Americans be in favor of QE? The good it does won’t trickle down to them and they’ll bear the costs of the harm.