Wednesday, February 20, 2013

Be Careful What You Wish For

When Jack Lew first proposed the idea of a sequester - an automatic set of spending cuts which would force Congress to make a decision about deficit reduction it was a semi-serious attempt to deal with the deficit.   But it was structured to give the GOP more heartburn than the Democrats.   It was unbalanced as to where reductions would take place.   The Heritage Foundation did a good graph on where the cuts are targeted.    (see below)

About half of the cuts are in defense, and there is no way that decision was not intentional.  It is unclear whether all the doomsday scenarios that have been bandied about will become real.  Yesterday, the President did a press conference which tried to deflect blame on the sequester where he said "So these cuts are not smart.  They are not fair.  They will hurt our economy.  They will add hundreds of thousands of Americans to the unemployment rolls.  This is not an abstraction — people will lose their jobs.  The unemployment rate might tick up again."   That is typical of this president, create the problem and then blame the opposition.  It would be wonderful if anyone in the Administration could act like a grownup.  But perhaps that is too much to ask for in DC at this point.    For the President, "tax reform" is raising rates but not improving the tax system.   You can see the balance that he believes in by looking at how the cuts in the sequester fall.    He has added to the mix by suggesting that all of the cuts will first come on things that people actually receive from government.   At some point the American people will understand that the "Washington Monument" strategy is pure crap.   Any competent executive could figure out how to get $85 billion out of a multi-trillion budget without inconveniencing anyone.   The subsequent year reductions could also be focused on where there is excess.   But of course that is not the game that the President is playing.

From my perspective there are two issues here.   First, is the President's claim about what the effects of the sequester will be, correct?   There the answer is simple, no.   Were the President serious he would be working hard to get the parties, including his own, behind a series of balanced alternatives.  I think he believes that the media will protect him from any blame on this, if there are consequences to these cuts.   From my perspective the effects of the cuts are much less than most Washington wonks have suggested.   Indeed, the media will protect him - but at some point the American people will see through the media wall and will begin to hold all of Washington responsible for their nonsense.

The second issue is more important.  Erskine Bowles and Alan Simpson have produced a revised  plan for reducing the deficit which is a lot more balanced.  They proposed an approach which is less reliant on tax increases and more reliant on spending reductions than the President seems to support.  At the same time, from my perspective, the revenue increases would seem to be focused not on raising rates but on reforming the tax code.  

In the original Simpson-Bowles plan there was an attempt to improve the code by cutting out a lot of the thatch that has grown up since the 1986 Reform Act.   That plan reduced a lot of sacred cows in the code but would have also produced a much simplified process for most taxpayers and lower rates.   Both of those changes would improve the prospects of economic growth.   Like the original plan I expect that there will be some parts of the final proposal that I will not like - but one has to look at the whole picture.   And from that perspective, the new outline looks like a creative and helpful step.

From my perspective we have three choices before us.   The best among them is the balance that Simpson Bowles seems to offer.   While I think we are taxed enough - I am more than willing to increase revenues in the quest of simplification of the Byzantine tax system.   The second best is to allow the sequester to take effect.  The first year cuts (which would take place on March 1) amount to a bit less than $100 billion.   There are many I do not like, the defense reductions over the course of the sequester are horrible policy. In the second alternative, Congress could always modify the longer term proposals.   The least best is the one advanced by the President - which basically starts with the assumption that spending a higher percentage of GDP through the government is a good way to revitalize the economy.

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