As President Obama and Speaker of the House John Boehner appear engaged in a budgetary battle, the Treasury Department is scheduled to run out of borrowing authority on August 2nd unless Congress raises the federal debt ceiling. Both President Obama and Speaker of the House John Boehner agree that Congress needs to see and approve a major deficit reduction plan before it will vote to raise the debt ceiling. They just cannot agree on a plan to present to Congress.
No one is sure what failing to reach an agreement will entail, but many analysts claim that the consequences will be severe. The U.S. government will not have enough money to pay bond holders what they are owed, leading to a downgrading of government debt and significantly higher future borrowing costs. The possibility of a flight from bonds could compound the problem, with a foreign-led sell off triggering a major dollar collapse.
President Obama has offered two different deficit reduction plans. One is designed to achieve a $2 to 3-trillion reduction over ten years and the other a $4 to 5-trillion reduction. The republican plan, of course, focuses on further tax reductions for corporations and the wealthy. The only thing certain about every plan is the relative breakdown between spending cuts and revenue increases - or lack of revenue increases.
As Ezra Klein explains in a Washington Post column:
[Under Reagan, Bush, and Clinton] taxes were at least a third of the total, and in Reagan's case, his massive tax cuts were followed by deficit-reduction deals that actually relied on tax increases. . .The ratio is said to be more balanced in President Obama's recently proposed $4 to 5-trillion deficit reduction plan: 75:25. Since that plan apparently includes letting the Bush-era tax cuts for the rich expire in January 2013, however, Republicans have rejected it in favor of continued negotiations over the smaller deficit reduction plan.
Bush also included taxes in his deal, and Clinton relied heavily on taxes in his first deficit-reduction bill, which passed without Republican votes. In 1997, when he was working with Republicans, he actually cut taxes slightly while passing spending cuts. But of course the economy was in much better shape then, and Clinton had already increased revenues substantially.
The one-third rule doesn't break down until you get to the deal Obama reportedly offered Republicans in the first round of debt-ceiling talks: $2-trillion in spending cuts for $400-billion in taxes, or an 83:17 split. And that, if anything, understates how good of a deal Republicans are getting. Tax revenues and rates are much, much lower than they were under Reagan, Bush or Clinton.
The truth may be that most of those who demand deficit reduction primarily through spending cuts have as their real goal a further weakening of the public sector and our social programs even though they claim that their only motivation is to do what is best for job creation. Governor Scott Walker provides a good local example of that.
The basic choices with deficit reduction are seemingly simple: maintain taxes and cut government spending or maintain spending and raise taxes. Cutting public spending pulls money out of the economy, costing jobs. So does raising taxes. The question then becomes: Do we lose more jobs by cutting spending or raising taxes?
According to Martin Hart-Landsberg, Professor of Economics and Director of the Political Economy Program at Lewis and Clark College in Portland, Oregon, “the fact is that almost all studies of the economic impact of changes in government spending and taxes on employment find that changes in government spending have a larger impact on jobs than do tax changes. That means cuts in government spending will cost more jobs than an equivalent increase in taxes. Therefore, if we really care about jobs, deficit reduction efforts should emphasize tax increases over spending reductions.”
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