Source: CBO. Click the chart to view more legible image.
by James A. Bacon
Boomergeddon is running right on schedule. The Congressional Budget Office released a report earlier this month disclosing that the federal budget deficit for Fiscal Year 2011, which closed September 31, was $1.3 trillion — equal to 8.6% of GDP. Two years into the economy recovery, the United States still racked up the third largest percentage deficit since the end of World War II. Meanwhile, economic recovery continues to drag. We’ll all consider it a triumph of economic policy simply to avoid a double-dip recession. One way or the other, the outlook is for chronic annual deficits above $1 trillion.
The response of President Obama to the nation’s fiscal challenge is so inadequate as to be contemptuous. As if $1.3 trillion in deficits weren’t sufficient counter-cyclical spending, he proposes to roll out a $450 billion Son of Stimulus. His plan: Keep the economy running on Keynesian crack, fight cuts in government programs, beat Republicans with the class warfare stick and raise taxes on job creators. If Obama were the captain of the Titanic, he’d be manning the helm and shouting, “Damn the iceberg, full speed ahead!”
But are the Republican candidates much better? To the extent that they don’t propose running up $450 billion in extra deficits, they would not accelerate the ruination of the country, as Obama would do. But to the extent to which their deficit cutting plans are weak-kneed and lily-livered, they won’t avert Boomergeddon. They will just put the economy on a slow glide path to catastrophe.
Mitt Romney, who represents the technocratic wing of the Elephant Clan, has called for initial cuts to non-security discretionary spending of $20 billion, reports the Wall Street Journal. But he won’t cut defense and hasn’t proposed serious entitlement reform. He would roll back corporate taxes and eliminate capital gains, dividends and interest for taxpayers earning less than $200,000. But even with dynamic scoring (recognizing that lower tax rates stimulate growth), the tax plan is not likely to pay for itself. Bottom line: The GOP front runner is the proverbial guy who wants to rearrange the deck chairs on the Titanic.
I have taken a liking to the plain-talking ways of Herman Cain, and conceptually I like his 9-9-9 tax plan, which calls for a flat 9% personal income tax, a 9% corporate tax and a 9% national sales tax. I do believe it would stimulate growth and create jobs — but it would be revenue neutral only if it delivered the promised growth and counted the tax revenue generated by that growth. So, even if it works as billed, Cain’s plan would create jobs but it wouldn’t cut the deficit. I have heard Cain say very little about how he would close that $1.3 trillion budget gap through spending cuts. If he were captain of the Titanic, he’d be saying, “Let’s poke around in the engine room and see what we can do.”
Only one candidate gets it, and that is Ron Paul. He laid out a plan yesterday that would cut federal spending by $1 trillion during his first year in office, achieved partly by eliminating the departments of Education, Commerce, Interior, Energy and Housing and Urban Development, as well as halting foreign aid, “ending foreign wars” and throwing in some tax cuts. Credit Paul for recognizing the magnitude of change that needs to be made. (As it happens, closing the budget gap by $1 trillion was the goal I set in Boomergeddon.)
Just two problems with Paul’s plan. First, it is an outlier. No one but a tiny fringe of the electorate will take it seriously. Most people will recoil at draconian nature of the cuts. Second, there is a legitimate economic criticism that can be leveled at the plan: Whacking $1 trillion in federal spending in a single year would cause massive economic dislocation and plunge the country back into a recession. Paul would save the Titanic from the iceberg by blasting a hole in the hull and preemptively sinking it.
Our only hope for averting fiscal catastrophe is to enact spending cuts on the $1 trillion scale that Paul proposes but easing into them over several years so as to temper the economic pain and minimize the political backlash that could lead two years later to the plan’s undoing. It wouldn’t hurt to throw in a dose of Herman Cain-style tax reform to energize the economy. U.S. businesses are sitting on $2 trillion or more in cash. If we can create the conditions to get corporations and entrepreneurs investing and hiring again — sorry, but protecting the jobs of teachers and fire fighters, as our president proposes, won’t do the trick — perhaps we can grow our way out of the doldrums.
But anyone who tells you can we achieve fiscal sustainability on the cheap and easy is a fool. And anyone who tells you we can kick the can down the road forever is a liar.
