Wednesday, August 3, 2011

Debt Deal a Draw

As no doubt everyone knows, Congress struck an 11th-hour deal to increase the debt ceiling. It seems to me that this deal could have been struck any time in the past month, as it largely reflects both parties' sticking points: no new taxes (right away) and a nominal reduction in spending that (slightly) exceeds the increase in the debt ceiling - the basic Republican demands - and a debt ceiling increase that extends past the next election (the basic Democratic demand). I try to find humor whenever possible, and God knows this situation requires looking very hard to find the humor, so I find it quite funny that both ends of the political spectrum are up in arms about the contours of the deal.

For example: RedState declares that "Obama is the bigger winner," while the Wall Street Journal quotes disgruntled Democrats with a headline "Liberal Debt Deal Revolt." The Journal's columnist James Taranto quotes a number of unhappy Donkeys:
A New York Times editorial calls the deal "a nearly complete capitulation to the hostage-taking demands of Republican extremists. . . . This episode demonstrates the effectiveness of extortion. Reasonable people are forced to give in to those willing to endanger the national interest." Haha, remember "civility"?

Former Enron adviser Paul Krugman is even huffier: "By demonstrating that raw extortion works and carries no political cost, [the deal] will take America a long way down the road to banana-republic status. . . . What Republicans have just gotten away with calls our whole system of government into question."

Roars Robert Kuttner of The American Prospect: "The United States has been rendered ungovernable except on the extortionate terms of the far-right. For the first time in modern history, one of the two major parties is in the hands of a faction so extreme that it is willing to destroy the economy if it doesn't get its way. And the Tea Party Republicans have a perfect foil in President Barack Obama."

And, as Roll Call reports, Rep. Emanuel Cleaver, the Kansas City, Mo., Democrat, "said early reports of the new deal appeared to be 'a sugar-coated Satan sandwich.' " Hey, it's better than peas!
Hyperbole much?

In my view, both groups need to take a Valium and relax. I am disappointed that next year's spending cut - the only year that really matters, as whatever "framework" this Congress create for future years will not be binding on future Congresses - is minuscule. However, it's hard to see how control of only one House of Congress could have allowed fiscally conservative Republicans to demand more. Similarly, while Democrats are no doubt unhappy that spending isn't going up next year, they are in a politically untenable position in trying to spend more given the public's unhappiness with both the size of the debt and a general unwillingness to see taxes rise.* Republicans whine that the Yet-Another-Commission Commission that will supposedly find another round of spending cuts by the end of the year are not constrained in some iron-clad way to avoid raising taxes. At the same time, though, the forces that prevented President Obama and a Democratic-controlled Congress from raising taxes in 2010 are at work in 2011 and 2012: a bad economy and little public appetite for higher taxes. Democrats whine that they're not allowed to spend more, borrow more, tax more, but it's not the Republicans who called a halt to the free-spending policies of 2007-2010, it was the voters.

In effect, this debt deal was a way to defer action on the important fiscal questions dividing the country: how will we ultimately get the debt under control? Will it be through higher taxes (and, if so, on whom?) or through reduced spending (and, if so, on what?), or, as seems most likely, a combination of the two?

Although both sides seem to acknowledge that the status quo is not sustainable, there is a fundamental disagreement about the way to solve the problem. Both in terms of day-to-day spending and, more importantly, Social Security and Medicare spending, Congress has promised more than it can deliver. It's promised generous government services combined with low tax rates. Both parties enjoy spending and dislike taxing; they differ only in degree. Yet, as Greece has discovered already and other European nations are slowly realizing, deficit spending to finance unsustainable payouts is not the way to the Worker's Paradise. Eventually those who end up footing the bill decide that they've had enough, and chaos ensues.

Whether we end up substantially increasing taxes** or substantially decreasing services,*** the piper will be paid. What we've done is to defer that conversation. There is no way to avoid having it.


* Where the public stands on raising taxes tends to depend considerably on the specific question asked. I think it's a fair generalization to say that most people are okay with raising taxes on other people but are not to keen on seeing their own taxes rise.

** I've seen some truly stupid things on the Aetherwebs recently regarding the relationship of taxes to job creation, as well as the ability of "the rich" to finance our current and promised future levels of spending. Suffice it to say for the moment that "the rich" don't have nearly enough money to let the government spend at European levels. If you want a European-style economy, be prepared to pay a lot more for it. That means you, people in the bottom 99% of the distribution (meaning me, too). The top 1% - with adjusted gross income above $380,000 - pay 38% of all income taxes, or about $392 billion out of $1,032 billion (as of 2008). In this group, the average tax rate is 23.3%. Doubling the average rate paid to 46.6%, just to make the math easy, would result in an incremental $392 billion to the Treasury, assuming that this increase had no effect on the economy or the level of tax evasion. A nice chunk of money, to be sure, but nowhere near the $1.4 trillion in current deficit, much less the larger deficits (counting Social Security and Medicare) going forward.

*** "Substantial" is in the eye of the beholder, of course. I've read that a switch from indexing Social Security payments from wage growth to price growth eliminates a good chunk of the Social Security projected deficit. Whether that's substantial to you depends on what else you've saved and how many years you have before retirement in which to adjust.


palabrapuddlegum said...

Oh, dear!

Honestly, I'm rather annoyed with both parties. We know we're going to have to cut services. We know we're going to have to increase taxes. There's no way around either. Paying debts requires belt tightening as well as shaking down the couch cushions. So why not split the difference evenly for once instead of engaging in all of this partisan pandering? Why not raise taxes *across the board* X percent (the percent most likely to get us to 1/2 the desired amount) and then cut services *across the board* by Y percent (the percent most likely to get us to the other 1/2 of the desired amount)?

I don't want any loopholes. No special circumstances. No hedge funds. No exempt status. It's going to be painful, but I'd much rather have the pain be spread fairly (and predictably!) in a manner that doesn't require a tax code manual the size of the dictionary. It's obvious that this needs to be done, and an across the board compromise with an equal amount of cuts and raised taxes is the quickest way to accomplish the goal. I'm terribly annoyed with congress for kicking the can instead of just doing what needs to be done.

Rhianon Jameson said...

I know what you're saying, Miss P! And I'll venture a guess that you've put your finger on what makes Congress so unpopular: endless wrangling about minutae, which, when examined carefully, turns out mainly to consist of which special interests get rewarded this time. (Not that I haven't been a beneficiary - among other things, I've long enjoyed the mortgage interest deduction, which is an expensive bad policy.)

But you touch on two reasons why Congress won't adopt your suggestion: the debt issue comes down to both the appropriate role (and hence size) of government and who will pay for it. Many people have awakened to the fact that the answers are *not* "infinitely" and "someone other than me," which is good, but we still have a deep divide on those fundamental questions.