James Pethokoukis

Politics and policy from inside Washington

Surprise! Obama budget panel might work

Jul 1, 2010 18:24 UTC

Washington commissions are usually political punchlines. Even President Barack Obama has mocked them in past. Yet his much-hyped deficit commission is a symbol of White House plans to fix America’s long-term budget problems. Actually, it kind of is the White House plan, it kind of is the fiscal strategy.

And maybe skepticism over the commission is overdone. Erskine Bowles, the panel’s Democratic co-chair, surprisingly favors big spending cuts over huge tax increases. That may be the best policy, but looks like increasingly savvy politics, too. Such an approach makes a deal with Republicans — and therefore real results – a bit more likely.

Bowles, a North Carolina investment banker and former Clinton White House chief of staff, is suggesting a cap on overall government spending and revenue of 21 percent of gross domestic product. The federal government currently spends 25 percent of GDP and takes in 15 percent as revenue, though both numbers are a bit distorted by the recent recession. By 2035, according to the Congressional Budget Office, spending could leap to 35 percent of GDP with revenue at 19 percent. By those numbers Bowles is suggesting that some 90 percent of the gap should be closed by cutting the spending side of the ledger.

The economic logic is sound. Spending cuts tend to be less injurious to growth than tax increases. Few countries have escaped debt traps through austerity alone. Canada is often pointed out as an example of successful austerity. But its 1990s economy also had an export boom thanks to a weak currency and more trade with the United States. Emphasizing reduced spending over higher taxes is even one of the fiscal ten commandments of the International Monetary Fund:

Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth – assuming a tax ratio of 40% – lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved. An acceleration of labor, product and financial market reforms will thus be critical. …

This will require a bias towards (current) spending cuts, as spending ratios are high in advanced countries and require highly distortionary tax levels. Some cuts should be no-brainers: for example, shifting from universal to targeted social transfers would involve significant savings, while protecting the poor. Containing public sector wages – which have risen faster than GDP in several advanced countries in the last decade – will be necessary.

All this would, of course, require massive restructuring of social entitlements. In return, other panel Democrats would demand higher taxes — a supposed “no go” zone for Republicans. But perhaps such a heavy bias toward spending cuts could pry loose a couple of GOPers if tax increases focused on eliminating breaks rather than raising rates.

Then again, tax increases of any sort might not be necessary, assuming spending cuts. If the economy grows somewhat more like it has through the 20th century than what is assumed by dreary CBO forecasts, that alone would reduce projected budget deficits by 25 percent in 2035.

Bowles is a dealmaker. And he’s been here before, leading political negotiations in the mid-1990s that helped create a string of balanced budgets. He just might pull off the trick again.

One VAT to rule them all!

Jul 1, 2010 17:31 UTC

Just how big a value-added tax would it take to solve America’s budget woes through tax increases alone?  Monstrously big, according to the Tax Foundation:


Recovery Summer and the big fade

Jul 1, 2010 17:24 UTC

So how goes the economic news today? The job market?

The jobless claims data remain the weakest indicator of labor market activity. On the face of it, the rise in the four-week average to the highest level since the beginning of March points to a weakening in the labor market and a potential decline in private payrolls. … we find the level and direction in jobless claims somewhat troubling and the increase is likely to feed double-dip fears.  (RDQ Economics)

How about on the factory floor?

Forward momentum is slowing down in the manufacturing sector … price pressures have virtually vanished in the short space of a month.” (IHS Global)

How about overall economic growth?

Incoming data have led us to lower our tracking of second quarter GDP from 4.0% to 3.2%. In addition, the ongoing tightening in financial conditions is leading us to mark down our projection for third quarter GDP from 4.0% to 3.0%. Since the intensification of the European crisis in late April, the risks to US economic growth have been tilting to the downside. The latest round of data confirm that the sovereign crisis transmission channels have been operative and weighing on the economy: export orders tanked, confidence has stumbled, and the hit to households’ equity wealth is becoming a considerable impediment to consumer spending (JPMorgan Chase)

Me: More and more arrows seems to be tilting the wrong way. I don’t know if there will be a double-dip recession, but the cake is rapidly being baked for a weak economy on election day in November.


And this:
http://money.cnn.com/2010/07/02/news/eco nomy/bankruptcy_filings/index.htm?source =cnn_bin&hpt=Sbin

With bankruptcy filings on the rise, how is it even possible to claim that an economic recovery ever took place here?

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