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Veronique de Rugy
When it comes to addressing our debt problems, there are no adults in the room. Democrats don’t want spending cuts, but they want to raise income taxes on top earners. Republicans want to cut nondefense spending, but they want to increase defense spending while keeping taxes at current levels for at least one year. But with four years of trillion-dollar deficits, a debt-to-GDP ratio of 100 percent, and entitlement costs that will soon consume half the budget, not cutting spending is no longer an option.
That’s why the sequestration cuts are only a start. Indeed, they aren’t really “cuts” at all. According to the CBO, without sequestration, discretionary spending would grow from $1.05 trillion to $1.23 trillion between 2013 and 2021. With sequestration, it will instead grow from $1.05 to $1.15 trillion.
That means going through with sequestration is just the beginning. It won’t make a dent in the size of our debt. More cuts will be needed in the near future.
Yet both sides oppose the sequestration they agreed upon. Republicans, in particular, insist that cutting military spending would kill 1 million jobs and shrink the economy significantly. We should take these claims with a grain of salt. Some jobs would be lost as a result of the cuts, but almost certainly not as many as the defense industry claims. What’s more, some of these job losses will be offset by increased output in other sectors as resources shift. Either way, the Department of Defense isn’t a jobs program and shouldn’t be treated as one.
The Democrats’ call for tax increases on the rich alone, meanwhile, should be understood more as political posturing than a serious proposal. Even if income taxes on all earnings levels could be raised back to Clinton-era levels without hurting the economy, the resulting revenue would not be enough to address our future debt problem.
Still, another temporary extension of the tax cuts would merely add uncertainty to an already gloomy economic situation. Furthermore, convenient temporary tax policies are precisely the sort of politically expedient decision that has put the country in this state of perpetual fiscal cliffs.
So what should Congress do? The United States has a debt problem. Economists have looked at the different ways other countries have tried to address similar debt crises. A review of the literature reveals that the most promising way to shrink the debt without killing the economy is to cut spending and not increase taxes.
The good news is that Congress already has passed a law that would at least cut the growth of spending. It is called sequestration. Allowing it to take effect is the least Congress can do. ρ
Contributing Editor Veronique de Rugy (firstname.lastname@example.org) is a senior research fellow at the Mercatus Center at George Mason University.
Kick the Can, Again
One of the few things Congress is good at is avoiding problems by kicking the can down the road. The Party of Military Keynesianism (Republicans) and the Party of Domestic Keynesianism (Democrats) are anxious to avoid the sequestration cuts they already voted for. With the Bush tax cuts and a raft of other tax cuts scheduled to expire at the same time, angst is ratcheting up on both sides of the aisle.
The CBO says the combination of spending cuts and tax increases would push the economy back into recession and increase the unemployment rate to 9 percent. These projections have given Republicans ammunition to resist tax increases and military spending cuts. They have given Democrats an excuse to oppose spending cuts while supporting the continuation of tax cuts for all but the “wealthy.” Consequently, both sides have been able to continue pontificating about the need to avoid a future debt crisis while doing nothing to prevent one.
My bet is that Congress will once again kick the can down the road; the real question is how. The GOP might capitulate on taxes to protect military spending. Or Democrats might capitulate on taxes to avoid substantive spending cuts. Another darkly amusing possibility is a temporary continuation of current policy in exchange for yet another deficit reduction commission. No matter which of these three scenarios plays out, it will only be a matter of time before Congress has to deal with Fiscal Cliff II. ρ