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Wednesday, July 27, 2011

Spending, debt and taxes

Too many Americans only hear “blah, blah, blah, blah and blah” when politicians and pundits discuss our current concocted crisis over the looming deadline to act on our nation’s debt ceiling.
When I worked in Washington, the term we often applied to such conversations is MEGO (“my eyes glaze over”).
But in the current crisis, many people do appreciate that something very serious is happening, that things seem to be going wrong and that there’s a fairly good chance that average middle-class people are about to get royally screwed.
I’m going to take a shot at a non-MEGO discussion of this crisis. It will be interesting to see how many of you click the “click here to read more” button.

First, the debt ceiling crisis is an invented crisis  The debt ceiling is routinely raised to address our country’s need to stay solvent, to meet our financial obligations and to adjust to growing markets and economies. The national debt ceiling was raised repeatedly – and routinely – under both Democratic and Republican Presidents – Ronald Reagan, both Bushes, Jimmy Carter, Richard Nixon and so on.
What’s different this time around is that the Republicans in Congress, driven by Tea Party extremists, have discovered a way to spin the idea of the debt ceiling to their political advantage. They have taken a normal, routine transaction and turned it into a major big deal.
What will happen if the debt ceiling is not raised? No one really knows for sure because this crisis is so rare. We defaulted in 1790 and we had a very brief period of default in 1979. The consequence of the 1979 lapse was a permanent increase of 0.6% in the cost of American borrowing.
There have been attempts in the past to use the debt ceiling as a political football and to play games with the timing. Indeed, this happened during Ronald Reagan’s term and, in angry terms, he told his own party members to knock it off!
If the United States reaches the debt ceiling point, there is the belief that it will be unable to make further expenditures – that is, the US will not be able to pay its bills beyond that point. When you hear talk of an impending catastrophe, that’s what they’re talking about. Beyond that point is uncharted territory.
Our credit rating would certainly be damaged. The position of the dollar as the world’s currency standard would be damaged, if not destroyed. The ripple effect on the world economy would be bad and would probably sink shaky economies that have strong links to the US (e.g. Greece, Italy, Spain, etc.).
If countries that hold our bonds – the biggest being China – start to think of us as a bad credit risk and SELL or redeem those bonds, there’s a pretty good chance our economy would collapse. Thank you, Tea Party.
Don’t we need drastic action to address our spending problem? Our “spending problem” is really a spending priority problem. Our government spending compared to the size of our economy is ridiculously low – we rank #144 out of 160 countries, with government spending only at 19.9% of our gross domestic product.
The spending problem we have is that we spend way too much on the military and way too much on health care. Our domestic discretionary spending – the Tea Party’s #1 target – has actually stayed the same over the past 10 years, while spending on the military grew by 79% and while mandatory spending (mostly medical programs like Medicare, Medicaid, VA, etc.) went up by 32%. Our wars against the Muslim world trashed our economy. And out of control health care costs will continue to drain our economy until “Obamacare” fully kicks in and starts to bring them down to sustainable levels.
We are also paying the price of years of insane and counter-productive tax cuts that have done nothing but make our debt and deficit issues worse while enriching the top 1%.
But don’t tax cuts stimulate the economy, increase revenue and create jobs? Some do, but most don’t. And all the hard evidence shows that the program of tax cuts we have had over the past 20 years only hurt the economy and cost American workers their jobs. Paul Krugman, Nobel Prize winner in Economics, recently labeled Senator Mitch McConnell’s claim (repeated by many other GOP leaders) that tax cuts increase revenue as a claim completely at odds with the evidence.”
Isn’t a balanced budget a good thing? The United States has not had much recent experience with living under a balanced budget, especially since the days of the Great Depression and World War II. We have had frequent economic boom times and downturns during those decades, but the level of imbalance in the federal budget seems to have had little effect. Except in 1938.
In 1938, pressure from economic conservatives in Congress on President Franklin Roosevelt forced him to cutback on federal programs aimed at putting people to work (not to mention helping them stay alive) during the Great Depression. Easing back on the federal spending throttle in the interest of balancing the budget pushed the nation back into the depths of the Depression until World War II finally ended it.
When times are prosperous, that’s the time to balance the budget. Like the last time this country operated under a balance budget – during the term of Bill Clinton.
Nobel Laureates like Krugman, and also Joseph Stiglitz, make the historical as well as mathematical case that in times of severe economic times, like our own great recession, it’s government spending, especially the kind that puts people to work, that brings the country out of its crisis.
As we’ve seen in recent weeks, cuts in government spending at the federal, state and local levels have led to thousands of government workers losing their jobs and, as a result, our economic recovery is now dead in the water. And now the Tea Party Republicans want us to cut some more?
The real problem is a revenue problem. We have slashed taxes to the lowest point they have been in 50 years. For the top bracket, taxes are lower than they’ve been in almost a century. Giant corporations pay little or no taxes despite huge profits – and they’ve rewarded the American people for their generosity with more jobs.
Yet, where do the Tea Party Republicans want us to cut? Social Security. Medicare. Medicaid. Vital infrastructure. Environmental protection. Scientific and medical research. Education. Housing. But don’t even think about ending tax exemptions for corporate jets!
So why is this all happening? I cannot see into the souls of the likes of John Boehner or Eric Cantor or Mitch McConnell. Or their Tea Party constituents. This is such a dangerous gamble yet they think they can pull it off – hurt Obama, pander to their base and walk away blameless.
Last Sunday, Nicholas Kristof asked “If China or Iran threatened our national credit rating and tried to drive up our interest rates, or if they sought to damage our education system, we would erupt in outrage.” Indeed, if a foreign enemy tried to destroy our economy, we would prepare for war. Yet for all practical purposes, that is exactly what the Tea Party and their Congressional followers are doing. Tea Party patriots indeed!.

Author: Will Collette