Miracle on Pennsylvania Avenue
It's the most wonderful time of the year -- budget season! The last time our two favorite political parties got together for some holiday cheer, we had deals offered and offers rejected and a bipartisan super-committee to keep everyone in line. The only thing we didn't get was a solution.
But this time will be different. Invigorated by his re-election, President Obama won't stand for any more nonsense or can-kicking this time around. Why such urgency? Because if Congress doesn't act before we pour out the champagne and ring in the New Year, "a typical middle-class family of four will see their taxes go up by $2,000." Thus, the White House is urging the sacrosanct middle class to let their representatives know just how much two grand means to them and shame the naughty Republicans into being nice.
Meanwhile, the nation once again has its back up against the pesky debt ceiling. So the president has also proposed doing away with the nuisance, by asking Congress to give him and his successors the unchecked power to raise it at will. A non-binding debt ceiling is hardly a debt ceiling at all, or an effective way to control the debt, but apparently creditors will be sufficiently impressed if we somehow manage to restrain ourselves and spend less than an arbitrary number.
But don't ask Harry Reid for any more ideas to reduce spending. With election season behind and holiday season ahead, he's plain tuckered out. "We've already done more than a billion dollars' worth of cuts," says the Senate majority leader on behalf of his caucus. "We need to get some credit for that."
Since the Democrats are, by their own admission, the Party of Mathematics, it will surely be a surprise to everyone that one billion is equal to only one-thousandth of one trillion. So the billion-dollar spending cut that Harry Reid has searched high and low to find will reduce this year's trillion-dollar deficit by a whopping one-tenth of one percent.
If cutting the remaining 99.9% of the deficit through tax increases sounds like a plan to you, keep in mind that though the tax code has varied greatly since World War II, tax revenues since then have always fluctuated between 15% and 20% of GDP, and averaged less than 18%. If we managed to increase the percentage from today's 16% to the high of 20%, we would collect, out of a $16-trillion economy, $3.2 trillion in revenues -- less than what was spent in any year of the Obama presidency, and much less than what is projected to be spent in the future.
Unless Democrats have found a truly magical tax code to put in our stockings, the only way to adequately increase tax revenue is to expand the economy -- something at which they have not proven particularly adept in the last few years. Nor could the economy ever begin to grow if enough money were taxed out of it to adequately service the debt.
Spending cuts, however, have the advantage of helping the economy grow soundly by keeping money in the private sector, rather than by transferring it to the public sector to be spent less wisely by our guardian angels on foolhardy projects designed for political rather than economic profit. Contrary to the Democrats' protests, a spending cut can be less painful than a tax increase since, rather than simply disappear into a black hole to pay off the debt, it redirects resources away from providing a public good to supplying a more efficient private good.
Taxes or cuts aside, no one is coming up with enough of either to make any significant reduction in our deficits, let alone the national debt itself. President Obama has been a little more creative than Senator Reid, and his most recent plan saves all of $2.4 trillion -- over the course of ten years, by which time the $16.4-trillion debt will have otherwise increased by another $10 trillion or so. Thus, he is willing to cut not even one quarter of what is needed to halt the growth of the debt. The Republicans' latest proposal is no better, cutting only $2 trillion, also over ten years. It seems that it will take a miracle for the president to sign off on any meaningful economic deal -- or to even be offered one.
Somewhat more than $2,000 of purchasing power is at stake for American families; the greatest threat to their well-being is not a fiscal, but a monetary cliff that happens to be much higher. But neither the Republican nor the Democratic plan solves either problem, and the only deal that seems likely is an implicit understanding that Republicans will agree to temporarily make a little less fuss, and Democrats will agree to temporarily make a little less fun of Republicans.
The two parties, for now, could pass a bill for the president to sign, extending the current tax rates permanently for the vaunted middle class, which we all apparently agree should be spared, for the time being, the pain of higher taxes. But on the matter of the debt, the current choice for Republicans is not whether to compromise, and thus accomplish nothing, or to hang tough and fight tooth and nail for any slightly less profligate budget that would also accomplish nothing. They should -- and someone needs to -- produce a plan that does actually address the magnitude of the debt and cuts, at minimum, $10 trillion over the next ten years in order to halt its growth. They could at least start off negotiations by proposing to reduce annual spending from an unsustainable $3.5 trillion to somewhere between $2.5 and $3 trillion. (During the halcyon Clinton years, it averaged just over $1.5 trillion.)
Any such plan will, of course, be decried as radical and dangerous. But the Democrats have been making it very clear that they will ignore whatever few forewarnings remain and promise bread and circuses to the bitter end, rather than present any accurate portrayal of our current economic plight -- its cause, magnitude, and solution. That unenviable opportunity will be left to the plucky and communicative Republicans -- so don't hold your breath.