People are spooked by the size of the deficit, which amounts to 40% of the recently proposed budget. The matter has come to dominate the ongoing polemic — but the problem with that is that deficits are a preoccupation of the sort of affluent suburbanites who have come to denominate our political system in recent times, rather than those of low to moderate incomes who may stand in need of the economic boost that deficit spending might provide. Dean Baker of the Center for Economic and Policy Research attempts to put the matter in its proper perspective at the Huffington Post.
“The country faces a serious crisis in the form of a manufactured crisis over the budget deficit….
“Larger deficits in the current economic environment will only increase output and employment. In other words, larger deficits will put many of our children’s parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing and other necessities for a decent upbringing. But, the deficit hawks would rather see our children suffer so that we can have smaller deficits….
“In spite of the deficit hawks’ whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. The current projections show that even ten years out on our current course the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country’s history….
“The story is that we are forcing people to be out of work — unable to properly care for their children — because people like billionaire investment banker Peter Peterson and his followers are able to buy their way into and dominate the public debate….”
David Wessel comments in the New Year’s Eve edition of the Wall Street Journal on the prospects for a deficit-reduction commission: “Commissions represent a failure of the ordinary political process to grapple with significant issues. But there’s a growing sense among political insiders that partisan tensions are so acute that only a commission or other device can address the issue.”
Partisan tensions are indeed acute — and a good example would be the WSJ’s own editorial page, as of Tuesday: “President Obama is poised to pivot next (election) year and denounce the horrors of deficit spending. So the White House is now floating a bipartisan commission to reduce federal borrowing, and much of the political class is all for it…. A budget deficit commission is nothing more than a time-tested ploy to get Republicans to raise taxes…. The real goal is to get GOP political cover for tax increases so Democrats aren’t run out of town in 2010 and 2012 for blowing up the national balance sheet…. The Democrats will use a tax-and-spend commission to confront Republicans with the false choice between huge tax increases or fiscal disaster. Republicans should respond with their own choice: They’ll agree to a deficit commission only if it takes tax increases off the table….”
The cover story in the London Economist’s American edition pertains to its leading article on this country’s fiscal problems. The article stipulates that stimulus should be continued as long as needed, but that a deficit-reduction plan should at least be floated, even if it is not put into place for a couple of years.
On the spending side, the discussion quickly moves to the matter of entitlements. “Raising the retirement age for Social Security and Medicare would save money while encouraging Americans to work longer, thereby expanding economic potential. Medicaid could be converted to block grants, compelling states to assume more of the burden of cost control.” But, the article stipulates, spending cuts alone will not be sufficient.
The article criticizes this country’s tax code for taxing income too much and consumption too little. Its recommendations: “First, broaden the income-tax base by eliminating exemptions, and if possible cutting rates. Second, introduce a carbon tax, the least distorting way to slow the growth in emissions. If that is not possible, sell rather than give away carbon-emission permits, or raise the federal fuel tax.”
Ultimately, the matter could come down to a bipartisan deficit-reduction commission whose recommendations would have to be voted on by Congress up or down, without recourse to amendment — a proposal about which murmurs are beginning to be heard in the press. “The commission could deadlock, or see its proposal voted down, precipitating the sort of market disruption the scheme was meant to avoid. But that actually may be an advantage: politicians may conclude that failure is not an option. The best defence against a crisis is to act as though you are facing one.”