Tuesday, August 2, 2011

The Debt Ceiling Deal: Looking for Cuts in All of the Wrong Places

At last the debt ceiling deal is done. Our nation won't default and there will be about $2.2 trillion in cuts,although there maybe some tax increases included in that number. However $2.2 trillion represents a small downpayment on the $8 trillion that will ultimately be required. Yes, $8 trillion. The much discussed $4 trillion grand bargain was also only a downpayment on what is needed. Moreover with the economy softening much of the $2.2 trillion will be washed away with lower tax collections and higher automatic spending. Thus don't be surprised if we see both tax cuts and spending back on the agenda in the Fall.

The real problem with the deal is that the cuts are in the wrong places. Too be sure much Nancy Pelosi's stimulus package of two years ago had to be undone, but our nation still needs infrastructure, research and yes, defense spending. In my opinion we will come to regret the steep cuts in the defense budget.

What should have been cut are the three big drivers of the longer term deficit: medicare, medicaid and social security. The Republicans made a huge mistake in not offering up some tax increases to achieve cuts in these areas. Unfortunately we will have to wait until 2013 until painful cuts have to made in the major entitlement programs. What I am writing about is not politics, but rather arithmetic. Bluntly put, medicare, medicaid and social security are not sustainable. Indeed it is likely that in a few years we will say the same thing about Obamacare.

As an aside an elegant deficit reduction plan would have kept the taxes embedded in Obamacare and delayed implementation of the spending for three years. But the President and the Democrats really don't care about deficit reduction, just as the refusal of the Republicans to to accept modest tax increases demonstrate that, they too, do not care about deficit reduction either. The Simpson-Bowles Commission had it right and President Obama's biggest political mistake was his failure to endorse the their recomendations.

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