Fiscal Fiasco
After defeating Mitt Romney, Barack Obama’s greatest challenge is the upcoming “fiscal cliff”—the simultaneous expiration of the Bush tax cuts and the scheduled implementation of sharp spending reductions entailed in the Budget Control Act of 2011, often referred to as “sequestration.”
After the 2011 summer debt ceiling negotiations, Congress designed sequestration as a painful last resort in case lawmakers could not produce a more balanced, bipartisan deficit reduction agreement. If sequestration were implemented, it would shrink the deficit by $1.2 trillion over ten years by inflicting sharp, across the board spending cuts that would devastate both Democratic and Republican interests. Most entitlements, federal agencies, cabinet departments, and defense programs would face deep cuts.
With the national debt above $16 trillion and the government currently spending $1.1 trillion more than it takes in every year, deficit reduction should be Congress’ top priority. However, it must be done in a balanced manner, and sequestration is anything but balanced. The Congressional Budget Office predicts that if sequestration were enacted, unemployment would rise to 9.1% and that gross domestic product (GDP) would contract by 4% in fiscal year 2013.
There are only two ways to prevent sequestration. The first option is for Congress to simply cancel it. While desirable in the short term, debts and deficits would continue swelling. The alternative is to pass a new plan to achieve sequestration’s deficit reduction target by January 2, 2013. While Congress will likely miss this deadline, the law can expire before it does significant damage if an alternative is enacted.
Unfortunately, Democrats and Republicans disagree over how to cut the deficit. The Democrats favor increasing the income tax for the wealthiest 1% of Americans while the Republicans favor decreasing spending. The two parties will need to compromise, as the problem lies in both spending and taxes, not just one or the other.
Democrats are right; the government needs more revenue. However, raising the individual tax rate is a bad idea. Small businesses, the engines of private sector job growth, are charged at the individual tax rate. They would be hurt most and would be less likely to hire people. Without salaries, workers cannot reinvest capital into the economy. Individual tax rates for small businesses should be cut substantially to spur job and economic growth. Democrats should focus instead on closing corporate loopholes that allow corporations like Apple and GE to avoid paying billions in taxes. This compromise would not taint the Republicans’ fiscal ideology of favoring small business while Democrats would get their tax hikes.
Republicans are also right; the government spends too much. They want to cut entitlements to balance the budget without scaling back military spending or raising taxes. There are two problems with this approach. First, eliminating the deficit without spurring another recession requires balanced cuts. Medicare, Medicaid and Social Security cost roughly $1.5 trillion annually. The middle class paid into them with the promise of a return. Eliminating these programs overnight would devastate the middle class and harm economic growth. Nevertheless, Democrats must concede that turning entitlements into voucher systems for younger Americans and raising the retirement age are required for deficit reduction. These cuts could save up to $150 billion per year.
Second, entitlements do not represent the whole spending problem. The military receives over $700 billion per year in funding, an amount the Army’s Chief of Staff General Raymond T. Odierno calls excessive. The Pentagon’s budget should be scrutinized and all nondiscretionary military spending should be immediately eliminated. The easy place to cut is foreign aid and overseas bases. No other country spends $150 billion annually on foreign aid and military bases for national security. Congress should take a lesson from other governments that have managed to keep their countries safe without violating others’ sovereignty. This compromise truly embodies fiscal conservatism by cutting enough spending to balance the budget without jeopardizing national security or devastating the middle class.
These three changes to government would help retire the deficit without increasing taxes for almost all Americans or prompting another recession. The Republican House Speaker, John Boehner, has reached out to the President, acknowledging that this problem calls for a rapid bipartisan solution. Obama has responded by reopening talks with House Republicans. Boehner must concede that corporations do not pay enough in taxes while Obama must concede that government spends too much on welfare. If both parties can sacrifice ideological purity for the economic wellbeing of the people they were elected to represent, a solution to the fiscal cliff is within reach.