Posts Tagged ‘Federal deficit’

Taxes, spending and the deficit

July 13, 2011

Source: Office of Management and Budget. Click to view.

The majority of Democrats say that the federal budget deficit should be addressed by raising taxes and cutting spending.  The majority of Republicans say that the federal budget deficit should be addressed by cutting spending and taxes under no circumstances should be raised.  Based on the chart, I would say the Democrats have the better of this argument.

Notice that the only time in the past 30 years that revenues exceeded expenditures was during the Clinton administration.  This is partly a technicality of accounting; the surplus in the Social Security Trust Fund was used to offset the general government’s deficit, even though Social Security is kept separate from the general budget.  It also reflects the moderate tax increases enacted during President Clinton’s first year, and the work done by Vice President Al Gore to improve governmental efficiency and reduce civilian important.  Even so, President Clinton did not project a budget surplus.  What brought his administration into the black was the economic boom during his second term.

During the George W. Bush administration, spending increased, covering the cost of wars in Iraq and Afghanistan and a new Medicare drug benefit, and taxes were cut.  The recession caused spending to increase and tax revenue to fall during the last Bush years, and the gap has grown even greater during the Obama administration.

The Republican leadership – Senate Minority Leader Mitch McConnell and House Speaker John Boehner – say that the deficit is the overriding problem, and non-military spending can in no way be increased.  But when possible tax increases come up, they say that you shouldn’t raise taxes during a recession—in other words, that the recession, not the deficit, is the overriding problem.

My own view is that as a result of the deindustrialization and financialization of the U.S. economy over several decades, we have to think not just about the deficit and not just about restarting the economy, but about rebuilding the nation’s economic strength.

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Shutdown, default and the debt ceiling

May 25, 2011
Double click to enlarge

The refusal by the Republican majority in Congress to raise the ceiling on federal debt means that, on the one hand, they think this issue is so important they are willing to put the functioning of the federal government at risk, but, on the other hand, they are unable to come up with a plan to actually bring the budget under control, and so leave it to President Obama to figure out.

A lot of people who discuss this issue assume that this would mean that the federal government would default on its existing debt.  A default would be catastrophic.  U.S. government bonds would no longer be considered an absolutely safe investment, which means the Treasury Department would have to pay more interest to attract lenders.  This would not only mean the federal debt would compound at a faster rate.  It would push up U.S. interest rates generally.  It would be more expensive to take out a car loan, a home mortgage or a small business loan.

Fortunately there are other options.

The most likely option would be a partial shut-down of the federal government.  I can’t guess what would be cut.  Presumably the military and Homeland Security would be exempt.  Would the national parks be closed?  Would the Postal Service suspend or reduce mail deliveries?   I don’t know.  Would it be legal to reduce or suspend payments for Social Security, Medicare and other so-called entitlements programs mandated by law? I don’t know.  Would federal employees have to take a pay cut or suspension of wages? Maybe.

Another possibility would be that the Federal Reserve system would simply create money to pay down the national debt.  That, in fact, is the normal mechanism by which money is “printed.”  It is what was done with “quantitative easing.”  I can’t guess the long-term consequences of this would be, but it doesn’t seem like a good idea.  But it is an option (if the Fed agrees – admittedly, a big “if”).  Creating money by buying Federal bonds would provide a means to keep the federal debt within the legal limit while continuing the normal operations of the federal government.

The final possibility is that President Obama would simply refuse to comply with the debt ceiling on Constitutional grounds.  But such a confrontation wouldn’t be his style, and the Constitutional argument seems weak to me.  It rests on Section 4 of the 14th Amendment states that “the validity of the public debt of the United States, authorized by law … shall not be questioned.”  But it is an option.  He could make his Constitutional claim and see what the courts say.

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Where the deficit comes from

May 24, 2011

If you are serious about reducing the U.S. government’s debt, you need to start with the figures shown in this chart.

Click to enlarge

The largest factor in the debt is the Bush-era tax cuts.  If you thought the most important thing is to reduce the government’s debt, you would restore tax levels to the level in the 1990s.  This means middle-class taxes as well as taxes on the rich.  I’m willing to do my share, if the millionaires and billionaires do theirs.

The next largest factor in the debt is the economic downturn.  Government outlays for unemployment insurance and food stamps increase, while fewer people are earning wages and salaries to provide tax revenue.  If you thought the most important thing is to reduce the debt, you would make a plan to put Americans back to work.

The third largest factor in the debt is the wars in Iraq and Afghanistan, now mutating into wars in Afghanistan, Pakistan, Libya and maybe Yemen.  If you thought the most important thing is to reduce the debt, you would make a plan to wind those wars down.

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What I would do about the deficit

April 14, 2011

I would put taxes back to where they were 10 years ago.

I would put military spending back to where it was 10 years ago.

If that didn’t do the trick, I would resurrect the idea of a single-payer federal health insurance plan.

Rep. Paul Ryan

I most certainly would not have the gall to proposed further reductions of the tax burden on the upper 1 percent of the population, as Rep. Paul Ryan and other Republicans do, and call this a deficit reduction plan.

Click on Tax myths and tall tales for an excellent article on taxes by David Cay Johnson in Rochester’s City newspaper.

Click on The Do-Nothing Plan for Annie Lowrey’s article on Slate explaining why doing nothing at all is more fiscally sound than adopting the Republican budget plan.  The do-nothing plan would allow the Bush tax cuts to expire and the Medicare savings under the Affordable Care Act to take effect.  These two things, she wrote, would bring the budget into balance within 10 years.

Click on Medicare Isn’t the Problem, It’s the Solution for Robert Reich’s ideas on how to cut health insurance costs.

Click on Ryan’s Five-Point Plan for a summary by Nobel economist Paul Krugman in the New York Times.

Click on The Budget Speech for Krugman’s views on President Obama’s budget plan.  My reaction is the same as Krugman’s.  I liked President Obama’s rhetoric, as I usually do.  My question is whether he will fight for his plan, which is a flawed compromise to begin with, or treat the points in his plan as bargaining chips to be negotiated away.

Click on Obama, Ryan and the Shape of the Planet for Paul Krugman’s comment on how the Obama and Ryan plans compare.

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