The Republican’s Debt and Deficit Blackmail

Tuesday, December 18th, 2012
GOP blackmail

(By The Pragmatic Pundit)

Republicans have been using debt and deficit blackmail as a bargaining strategy since the days of Ronald Reagan.Reagan’s brand of politics was successful at promoting the notion that federal government spending on social programs is mostly wasted on pointless handouts to lazy recipients. He carefully cultivated the impression that “government spending” meant “free money” for people who were nothing more than moochers.  Sound familiar?

Ronald Reagan was swept into office on the same Republican fearmongering-propaganda that grips the country today…”spending is out of control, the country is going bankrupt and government is too big.”

There is no denying Reagan inherited an economy that was in a deep recession, but his response to the debt crisis was far different than Republicans would have us believe.

Despite his “small government” rhetoric, Reagan expanded the federal government by 7%, employing a larger federal workforce (those greedy public employees) than any President in history other than Johnson who presided over the Vietnam War.

He did enact a huge tax cut, but then raised taxes eleven times; increased defense spending; ballooned the federal deficit to the largest peacetime deficit in history; raised the debt ceiling 17 times and accumulated a debt burden that equaled the previous 200 years of American history, turning the United States from a creditor nation into a debtor nation.  For the first time in the history of the nation, the United States borrowed in order to cover federal budget deficits.

David Stockman, Reagan’s economic wizard and the architect of the trickle-down budgets wrote:

“The Reagan deficits were intentional, designed to cut revenue as a way of pressuring Congress to cut programs Republicans wanted to destroy….The plan… was to have a strategic deficit that would give you an argument for cutting back the programs that weren’t desired….”

The “small government” mantra and “debt and deficit” narrative continued after Reagan left office and another Republican, Bush (41)  took the helm.

Daily News 1990:  Legislators Say There’s No Money.

During the tenure of these two Republicans, deregulation and imprudent real estate lending contributed to a Savings and Loan crisis and quite possibly the stock market crash.  Between 1980 and 1994, more than 1600 banks were closed or received financial assistance from the FDIC.  Over 1,000 banks with total assets of over $500 billion failed.  The number of savings and loans declined from 3,234 to 1,645.Taxpayers assumed the bill for a $124 billion bailout, while corporate scandals and bankruptcies made matters worse. Enron represented the biggest corporate scandal in history, while Worldcom MCI filed the largest bankruptcy in history.

That was the economy Republicans left for Bill Clinton and they were singing the same song: “spending is out of control and the country is going bankrupt.”  
CNN – 1995
Americans blame GOP for budget mess

Buffalo News 1995

Then as now, Republicans focused solely on cutting the social safety net and entitlement programs.  Remember welfare reform?  Republicans take credit for Clinton’s 1993 deficit-cutting package, but the truth is the balanced budget passed without a single GOP vote in either house of Congress.   By the time Clinton left office, there was a surplus.Bush/Cheney inherited the Clinton budget surplus and immediately began turning it into a deficit.

Despite their opposition to entitlements, Republicans passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 expanding the program (can’t privatize it, figure other ways for private corporations to extract money from the program).  After being debated and negotiated for several months, the bill finally came to a vote  on a November morning at 3 am while America slept.  Among other things, the bill prohibits the federal government from negotiating discounts with drug companies.  Read the curious legislative history.

Bush launched wars with Iraq and Afghanistan and introduced tax-cuts that primarily benefited the rich.  None of these expenditures were offset and they all were kept off the books, giving the illusion that the country was in a much stronger fiscal position than it was.  Republicans admit under Bush they  “spent like drunken sailors”,   but when the spending was taking place, not a single Republican rebelled.  Remember, running up debt and deficits is a strategy.  
Six weeks before President Obama was sworn in, the economy collapsed and the Republicans began their familiar chant…“spending is out of control and the country is going bankrupt.” 
Newly installed Governors cut the federal workforce; remember, Reagan ( the man Republicans credit with economic problem-solving) increased the federal workforce to one of the largest in history.  They cut employee pay and pensions, while they delivered more tax cuts to the wealthy.  They busted unions, destroying employees last firewall between workers and employers.  All of these acts redistribute the treasury from the middle class and working poor to the wealthy.

It isn’t ideology that drives the Republican insistence on spending cuts, it’s a strategy.  Think about it…the Republicans controlled the House, the Senate and the White House for four consecutive years.  They could have fixed Medicare and Social Security, but for some reason, there’s never a problem unless a Democrat is in the White House.Listen to how fervently they defend cuts to defense.  Why?  Afterall, defense workers are unionized public employees.  Because there isn’t a department that shifts more taxpayer money to the private sector than the Defense Department.  There is no other federal vehicle that allows the wealthy to extract more money from the treasury, convert more taxpayer revenue to the private sector than the Defense Department.

Throughout history, since 1783, tax cuts for the wealthy and increased defense spending and union busting have increased the gap between the revenues and the expenditures. Shareholders and those on Wall Street have enjoyed inflated returns, while the wages for workers have taken a beating.   It’s a 21st century Gilded Age.

In the final analysis, the real targets are Social Security, Medicare, Medicaid; any program that supports the less fortunate.   Republicans have a long-standing, deeply-held  antipathy for both Social Security and Medicare. Not only did Reagan advocate that Social Security should be privatized, he was at the forefront of a coalition against Medicare with the same arguments we hear today.

How did the public ever buy the idea that Republicans are good stewards of the economy?   Studies have been done comparing every phase of economic growth, during Democratic and Republican presidencies and congresses, and they all show stunningly better performance when Democrats are in power.

The trickle down miracle never worked because lower taxes don’t generate more revenue, they generate deficits.  It is a fact that is so mathematically  basic, it borders on common sense.

Solving the Debt Problems

Tuesday, December 4th, 2012

(By Mark Bridger, cross-posted at ThatMansScope)

For the past 40 years or so there has been a de facto class warfare in this country. While workers’ productivity has soared, worker compensation has remained essentially flat. Meanwhile, corporate profits have boomed and the gap between the top 2% of income earners  and the remaining 98% has widened to the largest its been since the gilded Age of the Robber Barons (late 19th century) or the time just preceding the Great Depression.

(There is really no dispute about this; to see some background and charts, here are some from the Economic Policy Institute.  Also check out this discussion of CEO pay increases at the Institute for Policy Studies.)

In spite of this, Republicans and other so-called “conservatives” are suggesting that we somehow must all share equally in reducing the public debt and balancing budgets. What makes this even more outrageous is that they don’t even mean equally. What they mean is that the rich should continued to enjoy tax breaks that are unequally in their favor, while Congress must enact spending cuts that hit programs that the wealthy don’t need or even like — e.g. national parks, protective regulation, healthcare and aid to education. Thus, as Weill/Brecht say in Three Penny Opera “The answer to a kick in the pants is just another kick in the pants.” Thus, the much-vaunted “Simpson-Bowles” prescription for paying down the debt is yet another kick in the pants for working non-rich Americans.

Yet, we can “fix the deficit” and end class warfare simply by cutting away the nonsense about “job creators” and “balanced approaches” and all the rest of that 2% propaganda that even the Democrats are circulating. Several years ago I suggested an alternative tax and spending program that would have balanced the budget (at that time): You can find it here; it has a link to a NY Times “budget calculator” which, though somewhat outdated, is fun to play with; click here (you can use it to check some of the figures for the suggestions I make below).

Here then is my updated program for tax fairness and spending reform.

1. Tax all income equally. In other words, eliminate a special Capital Gains Tax and tax all income including dividends at the same graduated rates. This will prevent Mitt Romney and Warren Buffet from paying at a lower rate than their secretaries.

2. Put a sales tax on sales and purchases of stocks and bonds. Speculators should pay a tax on their sales and purchases the same as most of us do on school books, garbage cans and refrigerators. I discussed this in a previous blog. This tax would be small (¼% on each sale and each purchase) and would not be burdensome to people who are actually investing as opposed to speculating. It could generate as much as $100 billion a year.

3. Cap total deductions for income tax purposes to something around $50,000. This was, in fact, an idea proposed by Mitt Romney near the end of this year’s campaign. I doubt that either he or any Republicans would actually support its implementation since it would do a lot to level the tax playing field.

4. Return the Estate Tax to 1998-2000 levels (around 50% on estates above $3 million — we could raise that to $5 million even).

5. Sell carbon licenses to industry and allow trading of these licenses. This was also at one time a Republican plan, before the party became opposed to everything except showering money on its wealthy patrons.

6. End the state of perpetual war and cut the military budget  to pre-Cold War levels (as percentage of GNP). Bring all troops home from Afghanistan and Iraq. Drastically cut troop levels in Europe, Japan and Korea.

7. End the expensive and ineffective War on Marijuana and redirect most of the rest of the ineffective “War on Drugs” toward treatment of addiction. This would save not just on police time but also help to lower the lavish spending on prisons.

8. Cut agricultural subsidies to big agribusiness (especially ethanol subsidies to “Big Corn”).

9. Cut oil subsidies to companies like Exxon-Mobil.

10. Save Social Security for a century by eliminating the limit on income subject to the FICA tax. Doing this would make raising the retirement age or adjusting the COLAs unnecessary.

Note that I didn’t mention ending the “Bush Tax Cuts.” I am assuming that they will disappear on schedule January 1. Reinstituting them for people earning less than a quarter million dollars a year will probably be one of the few things that will happen in a somewhat bipartisan way: the Republicans can’t afford not to.

This leaves the last and biggest elephant in the tent: Medicare, Medicaid, and healthcare in general. People far more knowledgeable than I have made many suggestions that might be effective. We know that the problem can be addressed effectively because every other advanced industrialized country (and many others besides) have systems that provide better healthcare results than ours and at half the cost. We should have had “Medicare for All” (the “public option”) but that didn’t happen because of the power of the insurance industry. Nevertheless, we can start with substituting “outcome-based” compensation for the current “fee for services” contracts. Instead of doctors and hospitals being paid for the number of treatments and tests they provide, they would be paid for keeping certain numbers of people healthy over certain periods of time. This is part of Obamacare, but needs to be the standard “operating procedure” for all of national healthcare.

The steps I have suggested above would raise far more money in a far fairer way than anything proposed by either political party. Furthermore, they would help reduce the burden unfairly placed on the working people of this country by 4 decades of class warfare against them.

Enough Preemptive Freakouts

Friday, November 30th, 2012

(By NCrissie B)

The Preemptive Freakout du Jour is, of course, whether President Obama is about to “cave” in tax and budget negotiations with House Republicans. Last weekend, senior White House advisor David Plouffe said that successful negotiations would require concessions from both Republicans and Democrats:

The only way that gets done is for Republicans again to step back and get mercilessly criticized by Grover Norquist and the Right, and it means that Democrats are going to have to do some tough things on spending and entitlements that means that they’ll criticized on by their left.

Cue the Angst Mongers:

Okay. Deep breath.

Note the speculative scare words, such as “could be a raw deal for the middle class,” and “We have a lot of questions here about where this is going to end up, don’t we?”

Never mind that President Obama has plainly stated that Social Security is “off limits” in these negotiations. Never mind that the math is the math and, despite the chart Ed Schultz showed about the current deficit, a new report by the Congressional Budget Office shows that our long-term deficit is driven almost entirely by rising health care costs for seniors:

The aging of the baby-boom generation portends a significant and sustained increase in coming years in the share of the population that will receive benefits from Social Security and Medicare and long-term care services financed through Medicaid. Moreover, per capita spending on health care is likely to continue to grow faster than per capita spending on other goods and services for many years.

If progressives criticize conservatives for ignoring data they don’t like – and we should – then we can’t ignore data we don’t like … and the CBO’s data are very solid.

To solve our long-term deficit problem, we must flatten the growth curve on health care costs, and President Obama began working on that with the American Recovery and Reinvestment Act, which included funding for computerized medical records and comparative studies of treatment outcomes. The Affordable Care Act also includes provisions to reduce Medicare costs, but Christina Romer – former head of President Obama’s Council of Economic Advisers – wrote in June that Obamacare was only the first step in addressing the health care cost curve:

A natural approach is to strengthen measures already enacted. Once the payment advisory board has a track record, for example, perhaps it could be empowered to suggest changes in benefits or in how Medicare services are provided – say, along the lines of successful demonstration projects.

Likewise, the Bowles-Simpson bipartisan fiscal commission recommended, as part of overall tax reform, limiting the amount of health insurance benefits excluded from taxation. Like the excise tax on high-priced plans, this change would probably increase pressure to keep costs down.

Even larger departures from the current system may be needed. The law creates health insurance exchanges where individuals and small businesses can buy coverage. Including a reasonably priced public plan as an option could exert downward pressure on the price of private health insurance policies by increasing competition.

Yet Dr. Romer did not expect progress anytime soon, concluding:

Sadly, serious debate over further cost-savings measures may be a long way off. Some Republicans seem more interested in just limiting the government’s share of health care expenditures than in slowing overall spending. And some Democrats seem more interested in just preserving existing government programs than in making the entire health care system more efficient.

For the sake of the nation’s fiscal health, and the health and economic security of American families, it’s time to embrace cost containment in health care as the next great legislative challenge.

These are real challenges that demand serious discussions of alternatives and their benefits, costs, risks, and tradeoffs. President Obama and leaders in Congress will debate those. I don’t like all of the options currently on the table. I may or may not like all of the solutions eventually adopted. It’s too soon to know.

But it’s a whole lot more entertaining to have a Preemptive Freakout because … well … President Obama always caves in to Republicans anyway, right? Except he doesn’t:

In policy terms, Obama clearly had gotten the better deal. The trouble was that the political world and the public had been conditioned to see this episode as primarily a clash over the top-tier tax cuts – and on that Obama had not gotten what he wanted. Consequently, the media depicted the compromise as a loss for Obama, and progressive Democrats squawked mightily about the continuation of the tax cuts.

As Corn concludes:

In a recent White House meeting with labor leaders and progressive activists, Obama signaled he is ready to fight the GOPers – and this time dare the Republicans to block continuing the tax cuts for the middle class. But no one ought to forget that Obama, a progressive in his policy preferences, remains a pragmatist. What happened two years ago is not an indication that Obama is likely to yield in the new face-off, but that he will be assessing the political dynamics in gridlocked Washington and be willing to bargain hard for a good deal with true benefits. That’s not caving in. It’s governing.

Yes, it’s governing. But governing is messy, and full of compromises and deals that look icky as we watch them happen. As John Godfrey Saxe famously said: “Laws, like sausages, cease to inspire respect in proportion as we know how they are made.”

Or Saxe would have famously said that, if so many people didn’t wrongly attribute his quote to Otto von Bismark and Mark Twain. Those mistakes happen when people substitute ‘sounds true’ rumors for actual facts. Just sayin’.

And yes, Ed Schultz, I’m sayin’ it to you, and the others who are busy with their Premptive Freakout. Enough. Go climb a tree and nibble on a macadamia. It’s a lot better for your blood pressure. And mine.

(Crossposted from Blogistan Polytechnic Institute (

Weekend Reading List

Sunday, October 21st, 2012

For this weekend’s reading list, we have articles about how Mitt Romney would be a servant of the right wing if he were to become President, how Romney’s “jobs” plan would destroy jobs, the cost of Romney’s plan to abolish Medicare, the flimsiness of Republican’s Benghazi criticisms, and why progressives should not cast a third-party “protest” vote.


Mitt Romney, Servant of the Right – a good overview of just how reactionary the agenda that Mitt Romney is running on is, which disproves the fantasy that Romney would somehow be a moderate if he were to become President.

Party Animals - recent history shows that were Romney to become President, his Administration would be run by the same right-wing Republican insiders that ran the George W. Bush White House.

Mitt Romney Has No Real Jobs Plan - an in-depth report on how Romney’s “jobs” plan relies on failed economic theories and would actually cost jobs, rather than creating them.

The Benghazi Controversy, Explained – an accounting of the Benghazi attacks that shows just how flimsy are the Republican criticisms of the Obama Administration’s response to the attacks.

Transforming Medicare Into a Premium Support System – an independent analysis finding that Mitt Romney’s plan to end Medicare as a guaranteed universal insurance program for seniors and replace it with vouchers would increase costs for the majority of seniors.

The Case Against Protest Voting - an argument that the importance of who gets lifetime appointments to the federal judiciary is a sufficiently compelling reason for any progressive to resist calls from some on the left that they should vote for a third party as a “protest” against President Obama



2nd Presidential Debate Liveblog

Tuesday, October 16th, 2012

Below are some in the moment thoughts about the second Presidential Debate.  Our take is that President Obama stood up proudly for his record, offered a positive vision, called out Romney’s lies in a calm and cool way, and, most importantly, showed some real fire in the belly.

Keep in mind that the post-debate impressions spread by the chattering classes in DC often shapes voters’ views about who won or lost a debate, so let’s all go out there and trumpet President Obama’s strong performance in social media, with your friends and family, in letters to your local newspapers, and by signing up to volunteer for the Obama campaign.

* * * * * * * * * * * * *

I missed the first 25 mins of the debate, and tuned in to Romney lying about his tax plan. What a shock.

Is Romney also going to give us all magic unicorns? No. In reality, he’s going to raise taxes on the middle class and take away our Medicare and Social Security.

Nice. President Obama ties Romney to the House Republicans, while linking Democratic policies to economic growth under President Clinton.

So what will Romney do first – produce his tax returns, or tell us what tax exemptions he will eliminate?

If Romney cannot stop his own Bain Capital company from shipping jobs overseas, then why would we think he would create American jobs as President?

The only “sources” that Romney can claim supports his mystical tax plan are blogs and articles written by Republicans.

Let’s see if Multiple Choice Mitt takes a position on Lily Ledbetter Act. He has refused to in the past, because his party opposes every effort to achieve gender equality.

The difference between Romney and W. Bush is that Romney is offering the Bush agenda on steroids.

Romney simply lied about access to contraception. He vowed to “get rid of” funding for Planned Parenthood, and supported the Blunt Amendment, which would have allowed any employer to deny its employees health insurance coverage for contraception.

President Obama has the real record of supporting actual small businesses.

President Obama has taken steps to make Medicare more efficient, without cutting benefits. Romney opposes those efficiencies, and wants to eliminate Medicare.

Under President Reagan, government employment increased significantly. Under President Obama, the GOP required massive layoffs of state and local government workers, which is largely what is holding the economy back.

Here’s how reactionary Romney is on immigration – he vowed to veto the DREAM Act, and wants to make life so difficult for immigrants that they will “voluntarily” leave the country through “self-deportation.

Here’s the details on President Obama’s sensible policy to stop deporting DREAMers – law abiding immigrants who were brought here by their parents when they were children.

And the Obama Administration took on Arizona’s anti-immigrant SB1070 all the way to the Supreme Court, while Romney calls Arizona’s law “a model for the nation”.

Romney’s “blind trust” is not blind - as he said, “blind trusts are an age old ruse.”

Nice to see the moderator call Romney out for being flatly wrong about Obama’s statement on Libya.  Here’s what President Obama said in a Rose Garden statement on September 12 – “No acts of terror will ever shake the resolve of this great nation, alter that character, or eclipse the light of the values that we stand for.”

Back in April, Romney went and kissed the ring of the NRA leadership, buying into their silly conspiracy theories rather than calling them out for opposing sensible gun safety legislation.

On jobs, Romney could begin by making sure his Bain Capital companies stop shipping American jobs to China, like Sensata is doing in Freeport, Illinois.

Here’s an example of what Romney’s Bain Capital is doing to every day Americans by shipping their jobs overseas.

If Romney cares about 100% of Americans, why did he tell his wealthy donors that he does not care about 47% of us?

President Obama knocked that closing answer out of the park – absolutely beautiful how he showed passion for every day Americans while making clear that Romney doesn’t care.

White House Burning, Part III: Choosing Our Future

Tuesday, October 16th, 2012

(By NCrissie B)

This week I am exploring Simon Johnson and James Kwak’s White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. First we considered the history of our federal debt and the relationship of government, money, and credit. Yesterday we looked at our long-term debt outlook. Today we conclude with the authors’ proposals for a sustainable budget that preserves essential programs and services.

Simon Johnson is a professor of entrepreneurship at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is a member of the CBO’s Panel of Economic Advisers and of the FDIC’s Systemic Resolution Advisory Committee. He was previously the chief economist of the IMF.

James Kwak is an associate professor at the University of Connecticut School of Law. In 2011–2012, he is also a fellow at the Harvard Law School Program on Corporate Governance. Before going to law school, he was a management consultant and co-founded a software company.

Johnson and Kwak founded The Baseline Scenario economics blog and also wrote 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

In Each Other We Trust

Few of us could afford to rebuild our homes after a fire or other disaster. Instead we buy insurance to pool that risk together. While it may seem like “redistribution” when our premiums pay to replace someone else’s home – or theirs pay to replace ours – we all benefit from the security of knowing our homes would be replaced if disaster struck. We trust each other to pay insurance premiums, and we trust our insurance companies to evaluate those risks well, to invest our premiums wisely, and to remain in business and pay claims when needed.

So it is with public insurance like Social Security, Medicare, Medicaid, unemployment, and other social safety net programs. Few of us can know whether we’ll need these programs, or for how long, and few of us could afford to self-insure against those risks. And while it may seem like “redistribution” when our premiums – taxes – pay for others’ benefits, we all benefit from the security of knowing the programs will be there if we need them. We trust each other to pay taxes, and we trust our government to evaluate the risks well, invest our taxes wisely, and to remain stable and solvent, and pay promised benefits when needed.

Or we should. In fact our federal government’s fiscal record is better than any insurance company’s. Since 1792, the federal government has never missed an interest payment and never failed to redeem a Treasury bond upon maturity. Our federal government has (almost) never failed to pay benefits promised by public insurance programs. Indeed that sound fiscal record – and the federal government’s economies of scale and non-profit status – make public insurance programs both less expensive and more reliable than any private insurer could offer.

Preserving our “fiscal space”

As we saw yesterday, we do face a long-term debt challenge. Our federal debt is currently 78% of GDP, and under current tax and spending policy the Congressional Budget Office projects that to grow to over 100% of GDP by 2040, if the Bush tax cuts expire. If the Bush tax cuts do not expire, the CBO projects our federal debt to reach 100% of GDP by 2030, and the the Committee for a Responsible Federal Budget projects that additional tax cuts in the Romney budget could push our federal debt to 96% of GDP by 2021.

The authors cite research of 20 countries over the past century, and found that countries with federal debts over 90% of GDP faced a serious risk of a sovereign debt crisis. That happens when investors no longer believe a government can or will meet its interest payments or redeem its bonds as they mature, as has happened recently with Greece. But the authors note that the U.S. is currently a special case: our strong economy, comparatively responsible government, and fiscal track record have made the dollar the worlds de facto reserve currency and the U.S. a safe ‘global bank.’

Still, they don’t expect that special status to continue indefinitely. Sooner or later, the authors predict, the U.S. will be simply another very rich, very advanced economy, with the same sovereign debt limits as other very rich, very advanced economies. They argue that is likely to happen within a few decades. To remain solvent, they conclude, we must reduce our federal debt to around 40-50% of GDP by 2030, and be able to keep our debt at that level barring unforeseen crises.

They concede both the debt-to-GDP target and the 2030 target are estimates, based on global economic history and projections. But those targets should ensure the U.S. has the “fiscal space” – available credit limit balance – to meet even an emergency like the 2008 financial collapse without risking a sovereign debt crisis.

Meeting our long-term commitments

Yet the authors emphasize that it’s not enough to simply balance our budget and reduce our debt. Government exists to help us solve problems and guard against risks that a market economy cannot or will not do on its own. Our grandchildren will not be better off with a government that has a balanced budget and low debt, yet cannot meet foreseeable risks like terrorism, economic crises, epidemics, or climate change. Nor will our grandchildren be better off with a government that balances its books, but cannot educate their children, maintain infrastructure for a functioning economy, safeguard public health, or ensure they can retire with dignity.

Those long-term commitments to our grandchildren are every bit as important as fiscal responsibility. And, the authors argue, we can meet those commitments – for our grandchildren and beyond – if we can agree to solve problems together rather than waving the flag of deficits and debt as a pretext for shrinking government such that only the wealthiest among us can feel secure from the whims of misfortune. “We the People” means all of us, and “We the People” can ensure that all of us have the basic necessities of life and the opportunity to pursue our talents and our dreams.

Two Scenarios

The authors argue that we can meet those commitments – preserve public insurance programs like Social Security and Medicare, ensure education and opportunity for our children, build and maintain infrastructure for a thriving economy, preserve a healthy environment, and meet foreseeable risks – and still reduce our federal debt to a sustainable 40-50% of GDP by 2030. But we’ll have to pay for it, and they offer proposals for two scenarios:

1. The Bush Tax Cuts expire on schedule

If Congress allow the Bush Tax Cuts to expire at the end of this year, the authors argue, we must reduce the annual budget deficit by about 3% of GDP by 2020. Along with the CBO’s projected economic growth, that would cut our federal debt to 40% of GDP by 2030 and allow us to sustain that through 2080, or to meet a major crisis. To reach that 3% of GDP deficit reduction, the authors propose the following (deficit savings in parentheses as percentage of GDP):

  • Energy – Introduce a carbon tax and gasoline tax, each with one-half low-income rebates (0.6%).
  • Finance – Charge “too big to fail” institutions for anticipated rescue costs and tax excessive risk-taking (0.2-0.4%).
  • Domestic Spending – Reduce farm subsidies and spending for Fannie Mae/Freddie Mac (0.1%).
  • Individual Tax Expenditures – The authors offer four alternatives that cannot be combined: (a) Reduce mortgage interest deduction, replace exemption for interest on state/local bonds with direct subsidy, phase out deduction for state/local taxes with one-half converted to direct subsidies, add floor to allowable charitable contributions, increase maximum capital gains and dividends tax rate to 28%, eliminate step-up of capital gains at death, reduce capital gains exemption for sale of home (1.6%); OR, (b) eliminate all tax expenditures (about 7%); OR, (c) cap tax expenditures at 2% of household income (0.9-1.8%); OR, (d) limit value of deductions to 15% of household income (0.7%).
  • Business Tax Expenditures – Eliminate all business tax expenditures (0.2%).
  • Consumption Tax – Introduce 5% value-added tax with one-half low-income rebate (0.9%).

2. The Bush Tax Cuts become permanent

Given President Obama’s and Democrats’ desire to preserve the Bush Tax Cuts for household incomes under $250,000 – at least until we recover fully from the Great Recession – and Republicans’ unwillingness to yield on tax cuts for the wealthy, the authors believe the Bush Tax Cuts will likely become permanent. If so, they argue, we must reduce the annual budget deficit by about 5.5% of GDP by 2020, cutting our debt to 50% of GDP by 2030. To reach that 5.5% of GDP deficit reduction, the authors propose all of the reductions listed above and add the following (deficit savings in parentheses as percentage of GDP):

  • Social Security – Increase earnings cap on payroll taxes to cover 90% of earned income, index retirement age to life expectancy (projections: 67 for those born in 1960-1984, 68 for those born 1985-2009, 69 for those born 2010-2035), cover newly-hired state and local government employees, increase payroll tax by 1% (0.9%).
  • Health Care – Phase out employer health plan tax exclusion with one-half low-income rebate, require minimum rebates for drugs purchased through Medicare, increase Medicare Part B premium to 30% of costs, increase Medicare payroll tax by 1% (1.3-1.6%).

Choosing our future

This makes the long-term cost of the Bush Tax Cuts clear. Without them, we could meet our commitments with fiscal changes that not only balance our budget but also advance important goals like encouraging sustainable energy. But with the Bush Tax Cuts in place, working families would face higher payroll taxes and seniors would face higher Medicare premiums. Even so, we would preserve Social Security, Medicare, and other public insurance programs in their current forms through 2080.

The authors concede that other economists and think tanks have proposed other plans. There are progressive plans that rely more on tax increases and conservative plans that rely more on spending cuts and ending public insurance programs in their current forms. They do not argue theirs is the Ideal Plan, or that any universally-accepted Ideal Plan is possible. Their point, as President Clinton noted in his speech at the Democratic National Convention, is that this is a problem of arithmetic. Any real plan to meet our long-term commitments – and reduce our federal debt to a sustainable level – must have numbers that add up similar to these.

Mitt Romney offers no such plan. President Obama has pointed toward one – the Simpson-Bowles Commission proposal – yet expressed his willingness to consider other alternatives, and he and Democrats are serious about meeting our long-term commitments while bringing our long-term debt into manageable shape.

The 2012 election offers a clear choice. Democrats are the Party of Fiscal Responsibility who say “we’re all in this together.” Republicans are the Party of Shrunken Government who say “you’re on your own.”

On November 6th, “We the People” will choose one future or the other. Let’s work to make it the best choice … for all of us.

(Crossposted from Blogistan Polytechnic Institute (