The Debate on the US Budget

Written by Dr. Dimitrios N. Koumparoulis

In an attempt to get a Grand Bargain, President Obama proposed a centrist deficit reduction package. Congressional Republicans rejected that package only because it raised taxes, and were unreasonable for doing so. Like his fiscal commission cochairs Bowles & Simpson, the President proposed a responsible and balanced package of tax increases and long-term spending cuts that would solve USA’s fiscal problems. Because they are unwilling to consider tax increases, Republicans are therefore to blame for the failure of a Grand Bargain and for future fiscal collapse.

The problem with this storyline is that eight months ago three prominent Senate Republicans supported the Bowles-Simpson recommendations, which contained a net tax increase. The House Republicans on the commission did not support those recommendations, but Senators Coburn, Crapo, and Gregg did. No one would call any of these three men moderates – all are clearly conservative.

The President has stressed his willingness to include long-term entitlement reforms, including raising Medicare’s eligibility age to 67 and, reportedly, a correction to the CPI. Both are good policy changes, and both are elements of Bowles-Simpson. The President argues that Republicans should, in exchange, be willing to agree to the tax increases he proposes – both a significant increase in total tax revenues, and specific policies like higher marginal rates for “the rich.”

But the effects on beneficiaries of the Medicare eligibility increase, and the budget savings that would result from such a policy change, are significantly mitigated by the existence of ObamaCare subsidies for near retirees. This is nowhere nearly as big of a “give” as it would have been before the new health laws. A CPI change would both reduce entitlement spending and raise tax revenues, so the political pain is bipartisan.

More broadly, these changes would only temporarily slow spending growth. While they are politically significant, they fall far short of the size and type of changes that you need to make to solve our entitlement spending growth problem. At best they kick the can down the road several years.

Let’s look at a few of the other provisions that conservatives would support in the Bowles-Simpson package that are not in the President’s proposed Grand Bargain. Parenthetical references are to the Bowles-Simpson recommendations.

Health reforms in Bowles-Simpson that are not in the President’s proposal:

Reform or Repeal the CLASS Act; (recommendation 3.2)

Medical malpractice reform; (recommendation 3.3.12)

Pilot a “premium support through the FEHB program” for Medicare; (similar to Ryan’s reform)

Establish a long-term global budget for total health care spending. (rec. 3.3.13)

Social Security reforms in Bowles-Simpson that are not in the President’s proposal:

Make the retirement benefit formula more progressive; (recommendation 5.1)

Gradually increase early and full retirement ages [for both Social Security & Medicare] based on increases in life expectancy; (recommendation 5.4)

Cover newly hired State and local workers after 2020. (recommendation 5.8)

Tax provisions in Bowles-Simpson that are not in the President’s proposal:

Cut rates across the board, and reduce the top rate to between 23 and 29 percent; (rec. 2.1.1)

Example:  Three brackets: 12% | 22% | 28%; (figure 7)

Establish single corporate tax rate between 23 percent and 29 percent; (rec. 2.2.1)

Move to a competitive territorial tax system. (rec. 2.2.3)

This is far from an exhaustive list. Other items from Bowles-Simpson are a part of the ongoing negotiations between the White House and Congress. Bowles-Simpson also included other provisions that most Republicans wouldn’t like, such as a 15¢ increase in the gas tax.

In 1997, to get a deal with Speaker Gingrich and Leader Lott, President Clinton had to cut spending enough to balance the budget and cut taxes. In 2010, Commission Chairman Bowles had to make fundamental changes to entitlement spending growth and to the structure of these programs to get some Republican support for a package that raised taxes.

Chairman Bowles found that, to get three Senate Republicans to support a net tax increase, he needed to repeal an expensive new health program, tick off the trial lawyers with malpractice reform, establish a pilot program for Ryan-Rivlin style Medicare reform, and place a cap on total health spending. He needed to increase the eligibility age not just for Medicare, but also for Social Security, and he needed to slow Social Security spending growth through changes to the benefit formula. He needed to tick off government worker unions by prospectively repealing their special exemption from Social Security. And he needed to agree to tax reform that would raise total revenues while dramatically lowering top individual and corporate rates.

President Obama has been unwilling to make any of these changes, and yet suggests Republicans are being unreasonable for not agreeing to net tax increases. The President refuses to discuss changes to the trillion dollar new health entitlement he and Congress created last year. He refuses to discuss changes to Social Security beyond a CPI correction. He insists that top tax rates go up. He attacked Paul Ryan for his long-term Medicare reform and refuses to consider it.

At least as important, Bowles & Simpson offered a long-term fiscal solution in exchange for this net tax increase, under which spending would never have exceeded 22% of GDP and deficits would have quickly dropped below 2% of GDP and eventually reached balance. That’s too much spending (and too high taxes) for my taste, but it’s qualitatively different from and far superior to the President’s proposal, which is to trade permanent tax increases for only a temporary slowdown in government spending growth and budget deficits.

Congressional Republicans are being castigated for opposing the President’s proposal. Many of those Republicans will reject any tax increase in any package, but some will consider the offer as a whole, and will weigh the spending control and reform they’re being offered in exchange for higher taxes.

And unlike the Bowles-Simpson package, the deal they’re being offered by the President is such a bad one that it’s not really a tough call.

 


 

 

 

Comments

 

ph.d. candidate,Department of Economics,University of Cyprus
written by Panagiotis Karavitis, July 25, 2011 

Vasika sxetika me to antikeimeno, tha elega oti ontas anenhmerwtos gia to sugkekrimeno thema, me plhroforhse arketa mias kai den gnwrizw tous logous ths sugkroushs.
auto pou tha ithela na rwthsw einai poia einai i protash twn repoumplicanwn gia thn sugkekrimenh krish xreous dedomenou oti kai aukshsh twn dhmosiwn paroxwn kai meiwsh twn forologikwn suntelestwn den ginetai

 

student in the postgraduate program of DEOS in AUEB
written by Dionysios Solomos, July 25, 2011 

Actually, the reduction of the public deficit in the USA is an emergency. The debate and the negotiations on the US Budget constitute a game of give n take between President Obama and the republicans. The key point is the tax increases. The package that president Obama offers, does not seem to satisfy the republicans and as a result the implementation of the Grand Bargain is still far. Despite the fact that there are indeed conflicts and differences between the two parties, the package is not being applied due to both parties interests and incentives. It is required an immediate solution in order the USA to confront the public deficit and to avoid a debt crisis. Both parties have to retreat and come into consensus. The Bowles-Simpson recommendations seem to be the reference point and the vehicle for consensus.

 

...
written by Dr. Dimitrios Nikolaou Koumparoulis, July 25, 2011 

Dear Mr. Karavitis take some critical points of the other side, is somehow like speaking to myself, since I am focused on the therapy of my science and I do not like to leave any space that my opinions reflect to a specific political party.

Clinton’s 1993 deficit reduction package raised taxes substantially. By 1997, taxes were above 19 percent of GDP — and rising. Though the 1997 deal included some very modest tax cuts, taxes passed 20 percent of GDP in 2000. Meanwhile, the economy was booming and middle-class wages were rising. That meant there was less need for further increases in spending. So Clinton cut spending and ratcheted back some of his earlier tax increases.
This moment is not that moment. Twelve years of tax cuts and a devastating financial crisis have driven taxes below 15 percent of GDP — a 50-year low. Wages have been stagnant or dropping for more than a decade and unemployment is above 9 percent, so there’s a significant need for social spending.
The addition of that contextual data gives you a clearer picture of the situation: Tax cuts tend to follow tax increases, and vice versa. In the 1980s, Ronald Reagan followed his large tax cuts with a series of smaller, but still significant, tax increases. In the 1990s, Bill Clinton followed his large tax increases with a set of modest tax cuts. And today, Republicans want to follow large tax cuts with ... more tax cuts.
That’s what has changed. And, notably, there were Democratic votes for the Reagan, Clinton and Bush tax cuts, because Democrats believe that sometimes taxes should go down and sometimes they should go up, even if they often disagree about when those times are or by how much. At the moment, it appears that the Republican Party’s position is that taxes should only go down. That puts Republicans far to the right of our economic history, and most economists. It doesn’t put Obama to the right of Clinton on the tax issue, as the tax increases Obama has proposed would hold revenues far below where Clinton put them. So if total taxes are your measure, Clinton is well to the left of Obama. And remember that that’s an active choice: Obama is proposing to make most of the Bush tax cuts permanent, which is, compared with current law, a far greater tax cut than anything Clinton ever proposed or enacted.
Perhaps Republicans can argue that they are right to be so inflexible. But that does not change the fact that they have been inflexible, and compared with the baselines set by Democrats in the 1990s or the Simpson-Bowles commission last year, Democrats have not been.
That's for an answer to your question which is somehow political
Let's come to the real problem now...
my comment is to read some interesting books, mainly to start with Confessions of an Economic Hit Man by John Perkins, and secondly The Web of Debt by Ellen Hodgson-Brown to name but a few ... it is a global net of debt and betting on the debt - it is a scheme well described by various as bounty making by indebting and re-indebting countries and hence preventing their economies to flourish and become competitors globally...
I borrow you 100 billion
I tell you to re-invest most of it in a fund and only use the difference right now for infrastructure payments to companies in the country giving you the lease and to use the dividends made and the value of the funds increase at the end of the running-time to repay the debt
in the meantime the borrower controls the funds and is in the USA
the US needs 2-3 bil USD every day to cover its foreign trade deficit
so to balance, money is moved to the US and invested on the stock and commodities exchanges and in international financial day-to-day betting
the issuer of the fund knows that the stock exchange is a periodic boom-and-bust cycle, since it makes no sense to see the stock values grow at rates so much higher than the real-economy
the implosion or bust is the destruction of a lot of debt, because this money needs not flow back from the US to the borrowers or investors abroad, it has simply disappeared
Now the same who issue and run the loans are those who issue and run the funds
and they are those who also start betting against those funds in the background - as Goldman Sachs did against the real-estate-funds before the crash in 2008 - and as the borrowers did in SE Asia in the late 1990 and in Russia
So, the funds crash and so the securities of the debtor
and the creditor - who is already betting against the debtor is in outrage ! What about my money !?!
Well, the rating agencies step in and say, in case of default, you will be downgraded to trash and the interest you need to pay is 25% annually
well, they find an arrangement somewhere inbetween, and the previous creditor, who bet against his own security on a grander scale, because they already made their share with the original set-up and investment-commission, and they make a debt-restructuring plan
The debtor has no more securities and back-ups, so, a new loan will be issued to repay the original loan plus new higher interest.
That means to borrow another 100% of previous loan plus interest accumulated, pls 100 % more to repay this old and the new loan, plus the interest on the other 100 %
So by destroying the whole cash in the funds the US economy is saved from repaying the equivalent amount of foreign investment or debt (you know balance of trade is negative, so payment must be positive in order to be in balance) - money in effect flows into the US economy and does not leave it backwards.
Some call it the customer of last resort - Todd - in reference to Keynes - calls it: the world of today is building the American pyramide (as a Keynesian means of keeping the global economy going)
Well, in the end - the only who profits is the creditor, and his friends with rating agencies and the US economy on the expense of the rest of the world or the target economy destroyed or hampered
but, how is it possible that so much money goes to the funds abroad every month - its all of our savings and insurance schemes in the industrialised capitalist world providing fresh money to the FIRE economy blowing up bubbles every month from our paychecks and payment orders. FIRE is Finance, Insurance, and Real Estate economy

I wish you all the best to your studies

 

Doctor of Philosophy in Finance Candidate, UGSM Monarch University
written by Payal Chadha, July 26, 2011 

I feel after reading the above article that increasing taxes overall will only be a burden on the people as a whole and it wont help their situation with respect to their earnings, inflation, etc. As it is, there is no savings as such in USA with the amount of debt i.e. credit cards, education loans, mortgages,high medical expenses, etc. The overall expenses of an average American citizen leaves them barely with just enough to take care of their necessary bills after all the taxes are deducted. The democrats and republicans should keep their differences aside and should device a middle path which benefits USA as a whole instead of making one part of the community happy while others on the suffering end. With the high unemployment rate existing, they should increase taxes for corporates and highest paid individuals who are getting richer every day and use these taxes for the benefits of the society where people require it the most. Medical expenses should be designed to accommodate the people who cant afford, social security benefits should be improved to help the old and needy after their retirement. They call USA the land of opportunity where it makes the lives of all the people. Let USA improve the lives of its own people first.

 

...
written by Dr. Dimitrios Nikolaou Koumparoulis, July 26, 2011 

Dear Mr. Chadha,
when you are a policy maker there are several times that you take decisions and measures that are possible in practise, even you should know that they do not reflect the majority of people in short-term. In economics we learn to think in terms of long-run economic sustainability.We learn two terms in public economics:pareto equilibrium and ricardian equivalence. is everything neutral or absolutely democratic in practise?....

 

...
written by Dr. Dimitrios Nikolaou Koumparoulis, August 01, 2011 

U.S. deal brings relief, but downgrade looms (Source:Reuters)
http://uk.reuters.com/article/...W20110801
just an extra comment
now the economic hit man trying to destroy the EURO zone are aiming at Cyprus, Ireland, Portugal, Italy and Spain
its an economic war going on
more global problem is the dollar, seeming to repay most of its debt by devaluation and bankruptcy, they either do it by busting the bubble on the overvalued stock markets, or they do by devaluation
They will never ever be able to repay their debt
the number of 14,3 trillion reflects only the federal budget deficit spending ceiling
the total US debt, federal, state, communities, and private is around 60 trillion currently, and still the volume of volatile high risk financial derivates operated by US financial brokers exceeds the global domestic product by 10 times
its bound to implode

 

Dphil Student Monarch University Switzerland
written by Liane Moosho Imakando, August 04, 2011 

The Fiscal outlook of the American Economy is not in good shape and calls for urgent measures in order to avoid a looming economic crisis. The issue is to navigate the balance between amount of revenue raised from taxes and spending in the national budget in the right direction and so keeping the dollar ih good health. The bottom line is how can the USA get to live within its means. I find the proposal by president Obama a necessary response to respond to the crisis. The question is is it good enough to get congressional support when put to the vote? To get there, there is a need to win over some republicans. The republican rejection of the President's proposal only on tax increase leaves a sour taste in my mouth. There is a tone of inflexibility that is focused on politically weakening the democrats. Cutting on spending without increasing taxes is a formula for fiscal disaster as it squeezes the budgets and spending cuts particularly on social services. The majority of the relatively lesser to do often bear the brunt. The lesser to do have the power to influence the vote. Democrats would risk their popularity if this was the case.

The opportunity to include some issues that republicans would be sympathetic too and yet not included in the president's proposal would have given a better bargaining power to the democrats in congress. Are there some missed opportunities here? Republicans are only focusing on one side of the fiscal scale. Clearly there was the opportunity for the democrats to leverage the possible support of the three prominent republican senators who supported the Bowles Simpson recommendation containing a net tax increase. Other republicans were also willing to consider the offer as a whole i.e weiging spending control and reform in exchange for higher taxes. There was opportunity to include some of the Bowles Simpson package provisions that conservatives would have been sympathetic to.

On the issue of kicking the can several years down the road, one tends to agree with this. There is need to clearly project the fiscal manoevers necessary to keep fiscal health in check in the future. So I agree with the need for a long term fiscal solution. However, I am not convinced that the proposed strategic solution of dropping the deficits to 2% of GDP is as easy as it sounds. Trade offs both on the tax side and the expenditure side are inevitable. It is getting the correct balance both economically and politically. The challenge is politically how democrats can maintain, increase or lose the general public votes in the coming USA elections based on the ulitimate decision that congress will make. The Democrats do need the republicans in congress to win the vote on the issue.

We all know by now that the president's proposal got majority vote in congress. The Republicans need not be blamed after all. For now a solution has been found. The question is how long this solution will last into the future? We see how this unfolds in reality on the American fiscal performance.