Wednesday, February 1, 2012

How to get deficits to drop: Nix Renewing the Bush Tax cuts!

The new report out of the Congressional Budget Office (CBO) clearly shows the way to get a handle on the mounting deficits: kill the Bush tax cuts, I mean ALL of them - for the middle class as well as the wealthy. If that one step is taken, the deficit - which is projected to be $1.1 trillion this year, will fall to $585 billion next year, and to $345 billion in 2014. Most critically, this falling deficit will keep the bond markets and domestic austerity fetishists at bay, while keeping social benefits sound.

It is very simple to achieve but requires political gumption, and levelling with the American people: telling them they simply can't have their cake (future Social Security, Medicare benefits) and "eat it too" (continued tax cuts). Make a choice, take your pick. You're big people now!

The bottom line is that doing nothing will become the most direct way to slash the deficit, because doing nothing in all that's required to finally retire or sunset the Bush tax cuts which have already outlived their usefulness and do next to nothing of economic benefit. The Financial Times analysis of Sept. 15, 2010 already showed that, including the observation that;

"“The 2000s- that is the period immediately following the Bush tax cuts – were the weakest decade in U.S. postwar history for real, non-residential capital investment. Not only were the 2000s by far the weakest period but the tax cuts did not even curtail the secular slowdown in the growth of business structures. Rather the slowdown accelerated to a full decline

Contrast this with the hike in taxes immediately after Bill Clinton took office, leading to the accumulation of more than $600 billion in surpluses by the time he left office (see the one large bump on the accompanying graph near 2000), and the creation of 20 million jobs. Meanwhile, the FT analysis observed that:

during each decade from the 1950s to the 1990s, growth in real gross non-residential investment averaged between 3.5 percent and 7.4 percent a decade. During the 2000s it averaged a mere 1%

Can politicos process this and keep their hands off the extensions triggers, including for the middle class? Who knows? The trouble is there is this hidden demon in all politicos that tempts them to play politics with things like tax cuts instead of levelling.

But, especially in the case of Obama, being serious this time around about not reviving these cuts, including for the middle class, could have salutary effects. Already the likes of The Wall Street Journal ('$5 Trillion and Change' today, p. A14) is trying to pin the record high deficit accumulation on Obama as well as the largest yearly one ($1.1 trillion for 2012). The best way to neutralize such attacks in future would simply be to allow all the Bushie tax cuts to finally meet their end.

Of course, the WSJ indiscriminately uses the graph released by the CBO (attached) but doesn't parse it correctly. For while it shows a major deficit emergence near 2010 (see the high negative gradient dip), this isn't all on Obama. Much of it is a cumulative payment back-log from the Bush 2003 Medicare Modernization Act which delivered a new prescription drug benefit that was never paid for, and which also included yearly deficit creating engines such as "Medicare Advantage" which spends $12-15 billion a year more on services than traditional Medicare. And we won't even go into the corporate welfare bonanza it's become and the disallowance of any demand for the Medicare Part D PhrmA plans to allow the government to bargain for lowest drug prices like the VA does.. So, of course you're gonna get a growing deficit!

Then there has been the additional costs of Iraq (more than $1.3 trillion - including $330b for the pullout prescribed by the Bushies in '08, NOT by Obama last year) and the enormous "supplemental" budgets associated with Afghanistan, in the vicinity of $600b a year. And, of course, the Buish tax cuts extensions - which truth be told Obama did have the chance to stop, but didn't. But in any case, they have added about $300b this past year in extra deficits that only he must take ownership for, while during Bush's rein and under his tax cut decade, they added over $2.7 trillion including interest. (Thus the more realistic graph projections, in red and blue ink- attached, belie the way the WSJ interpreted the CBO data.)

Let us hope that the politicians of both parties commit to doing the right thing this year, and next - and that begins with: 1) no more wars that aren't fully paid for with tax increases and 2) no more Bush tax cuts! For anyone!

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