… which makes this video out of date by about 20 minutes, but it’s instructive nonetheless.
… which makes this video out of date by about 20 minutes, but it’s instructive nonetheless.
Politicians last night announced the framework of a deal to increase the debt limit. In addition to authorizing about $900 billion more red ink right away, it would require immediate budget cuts of more than $900 billion, though “immediate” means over 10 years and “budget cuts” means spending still goes up (but not as fast as previously planned).
But that’s the relatively uncontroversial part. The fighting we’re seeing today revolves around a “super-committee” that’s been created to find $1.5 trillion of additional “deficit reduction” over the next 10 years (based on Washington math, of course).
And much of the squabbling deals with whether the super-committee is a vehicle for higher taxes. As with all kiss-your-sister budget deals, both sides can point to something they like.
Here’s what Republicans like:
The super-committee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser.
Here’s what Democrats like:
There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is “impossible for Joint Committee to increase taxes”).
In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.
But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about “shared sacrifice.”
This doesn’t mean there will be tax increases, of course, and this doesn’t mean Boehner and McConnell gave up more than Obama, Reid and Pelosi.
But as someone who assumes politicians will do the wrong thing whenever possible, it’s always good to identify the worst-case scenario and then prepare to explain why it’s not a good idea.
A couple of days ago I blasted President Obama for, in repugnant tradition, using “education” as a political weapon, invoking it to scare Americans into demanding increased taxes for “the rich.” House Speaker John Boehner, thankfully, did not abuse education similarly in his rebuttal. But his proposal for raising the debt ceiling illustrates just how weak the GOP’s commitment is to returning the federal government to its constitutional – and affordable – size. And I say this not because of the relative puniness of his proposed cuts, but what the proposal would do in education, the only area it specifically targets: increase funding for Pell Grants.
Now, I know what many people will say to this: Pell is a de facto entitlement; it has a big shortfall; and Boehner’s bill would offset the Pell increase by eliminating federal student loan repayment incentives and grad student interest subsidies. And do you just hate education, McCluskey, or poor people?
On the first points, yes to all of those, and the CBO even projects that over ten years Boehner’s bill would achieve some savings from his student-aid moves. But ten years is a long time, during which a lot of things – especially spending increases – could happen. And the seemingly forgotten fact of the matter is that we have a $14.3 trillion debt and are sooner or later going to need big, tough cuts. And though Pell Grants sound so nice – they give poor kids money to go to college! – they should be eliminated for several reasons well beyond frightening fiscal reality:
Republicans might not be as quick as Democrats to rattle education-tipped missiles, but they’re fully committed to keeping them in their arsenal.
I testified before the House Ways & Means Committee yesterday. As always, my trip inside the belly of the beast was an interesting adventure.
The tax-writing committee was holding a hearing on the value-added tax. I was on a panel with five other witnesses, and all of the other people testifying were sympathetic to a VAT. But since I had truth on my side, that made it a fair fight (though it did cross my mind that it’s not a good sign when a Republican-controlled committee stacks the witnesses in favor of a European-style tax system).
I made two points. First, a VAT is less destructive than the current income tax. As such, if we somehow repealed the 16th Amendment and replaced it with something ironclad that would prevent the income tax from ever again haunting the land, I would gladly make a trade.
But that’s not going to happen, so my second point was to warn that the VAT would be a recipe for bigger government. And even though some of my fellow witnesses said the revenue could be used to reduce deficits, I pointed out that Europe adopted VATs beginning in the 1960s and that hasn’t stopped welfare states such as Greece and Portugal from spending themselves into a fiscal crisis.
This chart, which is similar to what I included in my testimony, compares spending and debt levels in EU-15 nations (Western Europe) and the United States. As you can see, the burden of spending and debt is onerous in America (red columns), but even worse in Europe (blue columns).
That doesn’t prove that a VAT causes bigger government and more debt, to be sure, but it certainly seems to suggest that the other side is smoking dope when they claim a VAT will lead to deficit reduction. Instead, it seems like Milton Friedman was right when he warned that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”
I made some of these points in my VAT video.
The on-again, off-again “Gang of Six” has come back on the scene and is offering a “Bipartisan Plan to Reduce Our Nation’s Deficits.”
The proposal is quite similar to the one put forth by the President’s Simpson-Bowles Commission, which isn’t too surprising since some of the same people are involved.
At this stage, all I’ve seen is this summary (A BIPARTISAN PLAN TO REDUCE OUR NATIONS DEFICITS v7), so I reserve the right to modify my analysis as more details emerge (and since I fully expect the plan to look worse when additional information is available, the following is an optimistic assessment.
This quick analysis leaves many questions unanswered. I particularly look forward to getting information on the following:
Over the next few days, we’ll find out what’s really in this package, but my advice is to keep a tight hold on your wallet.
The President has issued an ultimatum that more tax revenue must be part of budget negotiations. Indeed, he endlessly repeats his desire for a “balanced approach,” implying that as much as 50 percent of the deficit reduction in any agreement should come from higher revenues.
Because I am a thoughtful, middle-of-the-road, pragmatic guy, I’m willing to accept the President’s ultimatum. I do have one tiny request, however, and that is for any such deal to be based on honest math.
What I mean by this is that I don’t want politicians to approve a budget that results in more spending, but then claim that they “cut spending” because the budget didn’t grow even faster. I want a spending cut to mean less spending (gee, what a novel idea).
And when they talk about new revenue, I want to see how much revenue the IRS is collecting this year, and measure revenue increases against that number. After all, the crowd in Washington should be happy to get more money, even if it is the result of benign factors such as more jobs being created, companies earning higher profits, and people getting more pay.
I assume these are reasonable requests. After all, this is how businesses and households operate their budgets, and I’m sure the political insiders wouldn’t want to use dishonest numbers to mislead voters (perish the thought!).
So what would a balanced approach look like, assuming we want to use honest math? The answer isn’t that complicated. I started with the latest estimates from the Congressional Budget Office for spending and revenues for this fiscal year (FY2011). I then assume, in the interest of a “balanced approach,” that spending should be cut by 5 percent each year and that revenues should climb by 5 percent each year.
The results, as illustrated by the graph, are remarkable. If we use a 50-50 deal of higher revenue and lower spending, we balance the budget in just five years. The President is right!
Taxpayers will be happy to know the “balanced approach” gets rid of red ink and also leaves enough room to make the 2001 and 2003 tax cuts permanent. Heck, there would be enough left-over revenue to enact additional tax cuts. After all, since we’re looking for balance, there’s no need to let revenues grow by 7 percent or 8 percent each year.
So, Mr. President, do we have a deal? Should we use your “balanced approach” and eliminate today’s big deficit by cutting spending and raising revenue by equal amounts? You were serious about your request, right? Hello, is anybody there?
As you already realize, I don’t think the President actually means what he says about a “balanced approach.” Or, to be more specific, I think he’s happy to do a 50-50 deal, but only if “spending cuts” and “revenue increases” are defined in ways that enable the growth of government.
Inside the beltway, this is known as “baseline budgeting” or “current services budgeting.” But whatever it’s called, it is a dishonest way of presenting information to the American people, as explained in this video.
I’m not a big fan of the rating agencies. I’ve warned in TV interviews that they generally wait too long before downgrading profligate governments.
So when the rating agencies finally catch up to everyone else and lower their outlook for failing welfare states such as Greece and Portugal, one would think that this would be seen as a useful – albeit late – warning sign. But European politicians are not very happy about this development. At the risk of mixing metaphors, they want everyone to keep their heads buried in the sand and to continue complimenting the emperor on his new clothes.
Here are some excerpts from a BBC report.
The European Commission has strongly criticised international credit ratings agencies following the downgrade of Portugal by Moody’s. The Commission said the timing of the downgrade was “questionable” and raised the issue of the “appropriateness of behaviour” of the agencies in general. Earlier, Greek Foreign Minister Stavros Lambridinis said the agencies’ actions in the debt crisis had been “madness”. Ratings agencies have downgraded Greece and Portugal many times recently. …German Finance Minister Wolfgang Schaeuble told a news conference that he wanted to “break the oligopoly of the ratings agencies” and limit their influence. …”The timing of Moody’s decision is not only questionable, but also based on absolutely hypothetical scenarios which are not in line at all with implementation,” said Commission spokesman Amadeu Altafaj. “This is an unfortunate episode and it raises once more the issue of the appropriateness of behaviour of credit rating agencies.” Commission President Manuel Barroso added that the move by Moody’s “added another speculative element to the situation”.
This is not the first time this has happened, by the way. Back in January, I mocked the President of the European Council for whining that “bond vigilantes” had the nerve and gall to demand higher interest rates to compensate for the risk of lending money to incontinent governments.
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