US Budget Deficit – Left, Right, Center

Posted on November 21, 2010

2


Spent the last two mornings catching up on the Charlie Rose show from this week.  He did a nice job of bringing in all sides to provide perspective and opinion on the US Budget Deficit Commission appointed by President Obama.

Bottom line – our standard of living and entitlements are too expensive for the tax base and structure in the country.  Even with the most bullish economic growth projections, the additional tax revenue that would be generated will surely fail to meet the budget requirements.

Here are the people Rose brought on his show this week:

Couple of key points about the commission recommendations:

  • The commission is given a due date of December 1, 2010 to submit a proposal.
  • There are 18 members on the commission, with 14 votes required to pass any proposal.
  • Current proposals call for a reduction of $3.5 trillion on the US budget deficit.
  • Reductions are coming from approximately 65-75% budget cuts and 25-35% revenue increases (read: taxes).
  • Social Security, in its current form, is out of cash by 2035 so there are specific recommendations to change this program including raising the retirement age over the next 50 years.
  • Tax credits such as mortgage interest is included in proposed cuts.
  • Neither side (right or left) sees passage of a specific proposal by the December 1 date.  Instead, the commission’s output is the generation of specific topical debate about this encompassing issue.

Rose also had Peter Orszag, former Congressional Budget Director, on the show about month ago.   Based on these facts and the input of the various players involved, here’s what I’m seeing:

  • Tax increases are an absolute requirement to solve this enormous problem. Peter Orszag specifically discussed this fact. This means expiring the Bush tax cuts and then either raising rates or expanding the tax base.  Currently, nearly 50% of all Americans do not pay any income tax.
  • Health care is a major problem even before it starts.  The newly enacted health care system will lead to tax increases in 2013 which, when coupled with either the expiration of the Bush tax cuts and/or additional taxes, will cause a piggy-bank shock to most Americans.
  • The entitlements programs such as social security are dysfunctional.  Social security-invested monies receive a 1% return to as low as -1% return for future generations.  We’re paying more money in that we’ll be getting out.  The idea floated by President Bush to enable private investing in market indexed securities was shot down, but that would provide a return closer to 5-7% over the long run.  This proposed solution is not in the commission’s recommendations, which leads to the necessity for raising the retirement age and cutting benefits over time.
  • The left seems to be taking a more antagonistic viewpoint.  Nancy Pelosi called the Commission’s proposals “unacceptable” and both Congresswoman Schakowsky and Dean Baker both pushed for additional stimulus to take demand-side action on the current economic condition. Both Schakowsky and Baker deemed budget cuts as off-target – they would rather increase taxes and maintain the existing entitlement programs (social security, health care, etc) on their current path.  This seems short-sighted and populist to me.   (In a moment of humor, check out Alan Simpson’s response to Pelosi – around 15 minutes into the interview with Rose. Let’s just say he cares not about Pelosi’s opinion.)
  • Paul Ryan suggested that the commission did little to tackle the problems introduced by health care.  Simpson and Bowles disagree.

My hunch is that Simpson & Bowles arrived at the 65-35 cuts-to-taxes number knowing full well that there would be backlash to cuts on both sides (ie. defense from the right, entitlement programs from the left) and in the end, hope to get to the inverse and be happy.  Problem is that neither side has the political will to do either.

When both sides fail to act as deeply as is apparently required, the eventual fiscal crash that arrives (and yes, it will come) will be the domestic policy equivalents of the September 11th attacks in the way that it brought the country together against a common enemy.  (Disclaimer – no, I am not comparing fiscal policy to terrorist attacks. I am using this a means to compare how the country united only.)

Interestingly, this may create an opportunity for a third party candidate to emerge.  In the recent mid-term elections, the left got more left with centrists getting whipped and the right got more right with the Tea Party victories.  This polarization will create more inaction at a time when great action is required.  Let’s hope there’s a true American statesman out there to take charge.