Point-Counterpoint: Closing The Deficit

Cut Spending Immediately

By Chris Goodnow ‘14

Since the dawn of the bailout and stimulus-ridden era of the Bush and Obama administrations, the U.S. government has taken an inherently wimpy approach in tackling the Great Recession. By promising to gladly pay us Tuesday for stimulus funds today, rampant deficit spending is not only bankrupting the country, but is also threatening any hope of a speedy and effective economic recovery. Therefore, given the gravity of our current $14 trillion debt, the U.S. government can no longer kick the can the down the road, but must instead immediately adopt deep fiscal austerity measures. The reduction of government interference and cuts in wasteful programs, coupled with stimulative tax cuts for all Americans, will provide a cheap, market-based, and sustainable path for long-term growth, as opposed to the negligible short-term gains that so-called “stimulus packages” purport to offer.

While government spending projects are an ineffective means of stimulating economic growth under any circumstances, the misallocation of taxpayer money is even more foolhardy when such policies are funded with borrowed money. As of the publication of this article, the federal debt stands at approximately $14.1 trillion, or almost 96% of our Gross Domestic Product. On February 14th, President Obama predicted that the public debt would be larger than our entire economy by September, and this year’s projected $1.5 trillion budget deficit will be the largest in American history. And yet, despite all this terrifying data, many are still calling for Congress to raise the debt ceiling without a plan to implement long-term spending cuts. Such a decision would be imprudent and illogical, for ballooning deficits and increased government spending are collectively the greatest threat to our economy.

Unprecedented deficit spending inherently requires unprecedented inflation, which undermines the purchasing power of the U.S. dollar and curtails growth in real GDP. The government is constantly printing money in order to finance the one-third of the public debt that it owes to itself, as well as paying for the interest on all of its loans and projects. Efforts by the Federal Reserve to stimulate the economy, such as the $600 billion released through last November’s Quantitative Easing 2 (QE-2), were projected to increase inflation by 2%-5%. Obviously, attempts to print enough dollars to deflate the entire U.S. debt would cause much more drastic and even perilous inflation.

There are many, however, who contend that inflation is not necessarily bad for the economy; that with economic growth, price increases will be mitigated by increased incomes. While in the short-term this outcome would be acceptable, in the long-term this strategy has two major flaws. First of all, on a global scale, increased inflation at home means even greater increased prices abroad as the relative value of our currency depreciates. For example, due to the weak position of the dollar and the uncertainty still inherent in the U.S. economy, oil-producing countries have begun to suggest that oil not be traded in dollars, but instead using Special Drawing Rights (SDR’s). These assets would be linked to a basket of currencies, such as the Euro and Pound, which are worth considerably more than the Dollar. If this plan were to be implemented, the U.S. would see drastic increases in oil prices that could spell disaster for the economy. Second, our economy is not growing at a suitable rate to counteract projected inflation increases. While the economy grew 3.2% in the fourth quarter of 2010, this statistic is an anomaly in the past 3 years of our economic malaise. Hopefully this trend of growth can continue, but with a new study released by the University of Michigan that has projected an inflation rate of 3.4% this year alone, it is simply unwise to elect not to manage our inflation issue in hopes that the economy will boom in the very near future.

With such a grim picture painted for the U.S. if spending is not cut and the American consumer is not put back in control of the economy, what must be done in order for us to finally see the light at the end of this long and dark recession? To put it simply: spending cuts and tax cuts.

No aspect of government can be spared from deep and penetrating funding cuts, including entitlements. According to the Government Accountability Office, entitlement spending (welfare programs, Medicare, Medicaid, unemployment insurance, and Social Security) comprised approximately 57% of the federal government’s $3.55 trillion budget for 2010. If any deep and enduring financial reforms within government are to be made, they must start with entitlement spending. The retirement age must be raised in order to avoid bankrupting Social Security, which is projected to run annual deficits in just 6 years. Even more importantly, however, the government must begin to substantially reduce the payroll tax burden so Americans can manage their own retirement by selecting investment vehicles with higher yields. Unemployment benefits must be cut and reallocated only to those who truly need them. Market-based reforms in healthcare, such as allowing consumers to buy coverage out of state, must be adopted in order to lower healthcare costs and thus ease the burden on Medicare. Without significant reforms in these arenas, the rest of our budget-balancing efforts are in vain.

Every major segment of the federal government must be cut if we are to settle the debt question. This includes the Defense Department, which, comprising approximately 18.74% of the federal budget, is too large a portion to avoid the scalpel of cutbacks. There are already proposals in the works to reduce bureaucracy within the defense budget, such as the elimination of an unneeded military headquarters in Norfolk, VA that would save the Defense Department approximately $1 billion. However, these cuts must be made with prudence and discernment, for any cuts that threaten national security in any way are totally and unequivocally unacceptable. For example, it is intolerable that China has authorized funds for its J-20 fighter jet, which is poised to be the most advanced in the world, while the U.S. counterpart, the F-22, has been sacrificed on the chopping block. In all instances, Defense funding must be cut while concurrently maintaining the U.S. military as the finest fighting force in the world.

While deep spending cuts must be employed, their full effect will only be felt if tax decreases are included in any plan toward economic recovery. Reductions in capital gains taxes will make businesses more profitable, thereby leading to higher employment  and a more robust economy. This “supply-side” stimulation would drive inflation downwards while simultaneously increasing real GDP, propelling the economy back to sustainable growth. By reducing all income tax brackets, investment in new technologies will increase, consumption will increase, and the standard of living will invariably rise.

While many claim that lowering taxes is an unacceptable strain on the deficit, we need only look to the Economic Recovery Tax Act of 1981 for an historical example to the contrary. The Heritage Foundation notes that although Congress lowered each marginal income tax bracket by 25%, income tax revenue rose by 28% after adjusting for inflation. If implemented in tandem with deep spending cuts, tax decreases will not add to the deficit, real GDP will rise, and the U.S. will avoid deeply detrimental stagflation.

Unfortunately, there are many politicians who allege that government waste is a myth, and instead advocate raising taxes on the hardest-working and most profitable Americans in order to fund their unchecked spending spree. This shortsighted, economically unsound, and amoral approach is no more logical than applying a small band-aid to a large, gushing wound. Raising taxes in the midst of a recession, whether directly or under the cloak of “closing loopholes,” is the worst possible policy the government could employ. Businesses of all sizes, which already face significant government-imposed impediments, would have to sacrifice more of their own revenue, thereby inhibiting hiring and investment in new fields. Populist demands that tax increases be targeted only at millionaires and billionaires ignore the true source of economic growth, which arises not by government fiat, but from private sector spending. Furthermore, if economic activity is severely hampered as a result, the additional revenue generated by the tax increase will be limited or even nonexistent, thwarting efforts to reduce the deficit.

At its core, the inherent problem in our economy lies not in American citizens, who for centuries have proven their entrepreneurial spirit and ability to thrive in competitive markets, but instead in a bloated government bureaucracy that misallocates and poorly spends the fruits of their labor. We did not drive the public debt to once unthinkably high levels; the government did, and they therefore should be the ones responsible for cleaning up after their own mess. We must instead cut government and end the seemingly interminable increases in deficit spending so that trust and stability will once again be instilled in the marketplace, allowing us to pursue sustainable growth far into the future. The American people, not the government, are the engine of progress, the team with which we can “win the future.”

Response: Raise Taxes on the Rich Instead

By James Di Palma-Grisi ‘13

For the past century, the American model of capitalism has included a social safety net designed to protect workers against the negative impacts of market downswings. This system has proven remarkably durable, but today has come under sustained assault, as evidenced by the attempts of various governors, both Democratic and Republican, to curtail salaries and benefits for members of public employee unions. While certain arrangements are worth revising, such as the pension system (which pays redundant funds to high-earners who don’t need them) and the healthcare system (which only covers 80% of declared costs, putting many hospitals in financial straits of their own), the time to enact such reforms is not in the midst of such a deep and persistent economic crisis, if our goal is to return to normalcy. While there is no doubt that we must restructure our economy, this goal cannot be achieved through the wholesale slashing of defense, medical, and pension funds is the appropriate option. Such an approach, as Barack Obama wisely noted during the 2008 presidential campaign, would be like using a hatchet where a scalpel is needed.

One must consider the impact on the economy of such a radical plan. Slashing healthcare in a time of crisis will only send more unemployed Americans to the emergency room, thus increasing overall healthcare costs and sticking taxpayers with the bill. Preventive care funded through Medicare and Medicaid may be most costly in the short term, but in the long run, by allowing diseases to be diagnosed and treated before they become serious, they will in fact save money in the long run. This is a point that even former president George W. Bush acknowledged in creating a Medicare prescription drug program. Pensions work in the same way. Although Social Security is costly, it is much less expensive than the alternative– seniors suffering from malnutrition or inadequate housing, which would result in far worse problems and costs than the current system. In evaluating such programs, one must consider more than just dry budgetary analysis, but also humanitarian and moral argument, in order to determining the nation’s priorities.

Not only would such options be unconscionable, there are easier ways to solve the deficit than by inflicting pain among the poor and elderly populations.  Printing money is not a good idea, generally speaking, because it devalues the money already in circulation, contributing to inflation. Nevertheless, in dire circumstances such as those we currently face, one must weigh the consequences of inflation against the repercussions of monetary restraint. Our greatest threat is not inflation; despite rising commodity prices, core inflation remains low by historical standards. Rather, as Professor Paul Krugman has repeatedly observed in his New York Times columns, the U.S. must avoid falling into a currency trap like the one that has kept Japan in a perpetual state of stagnation for the past two decades. Of course, the United States eventually needs to address its debt problem, but before we can tackle that hurdle, we first must ensure that our economy is on the path toward sustainable growth, or any austerity drive will be both futile and self-defeating.

Once the recovery is fully underway, the U.S. can begin to focus on addressing the budget gap, but even then, we should proceed with caution. Some areas– for instance, defense spending– should be spared from enormous cuts; no American wishes to deny our troops the resources they need to protect the nation. Nevertheless, there are ways to reduce costs without impeding our military strength. For instance, the widespread use of military contractors is a well-documented source of waste, fraud, and abuse. Companies routinely overcharge the taxpayers, lowering costs through the use of flimsy material and shoddy workmanship and pocketing the surplus. Given the heavily reliance of U.S. military operations in Iraq and Afghanistan on private contractors, a more effective system of accountability, auditing, and oversight could help to reduce the Pentagon budget without limiting the ability of our armed forces to pursue their objectives.

As has been made clear, significant cuts in spending of any sort are imprudent policy during an economic crisis, since they will have harmful effects both on the welfare of individuals and on the economy as a whole. At the same time, it is impossible to deny the looming danger posed by our massive and rapidly expanding debt burden. Therefore, we must turn to a politically toxic, but ultimately necessary, solution– revenue increases.

To be sure, raising taxes on the middle class would prove detrimental, as it would stifle consumption and investment. Therefore, we must demand greater contributions from the wealthiest Americans, who are comfortably situated and can afford to give up a small additional portion of their already large incomes. This policy is not ideal, but given the available options, it is the least bad choice. Moreover, by raising taxes on the rich as part of a broader tax reform scheme, we can bring in more revenue while also encouraging productivity. Under the status quo, the tax code is immensely complex and riddled with loopholes that allow special interest groups to game the system. Eliminating these exemptions will insure that business succeed on the basis of merit, rather than government favoritism.

Despite the fevered rhetoric of Tea Party activists, tax rates in the U.S. are among the lowest in the developed world, and the tax burden is less progressive than in much of Western Europe. While no one likes paying taxes, they fund vital services, such as infrastructure, education, public safety, and national defense, which not only improve the quality of life, but also promote economic activity. Free-market ideologues ignore the fact that many of these goods would not be provided by the public sector because their benefits are widely diffused across the population. Government must intervene to subsidize such activities that carry positive externalities.

Decades of reckless fiscal mismanagement have placed us in our present predicament. There is no easy way out– we must be prepared to make sacrifices, and accept hard choices. The burden of trimming our massive deficit, however, should not fall on those least able to bear it. Rather, the upper echelons of society, who have witnessed a much faster return to prerecession income levels than the rest of the country, should shoulder the impact of cutting the deficit. By marginally increasing taxes on the privileged, we can ensure the survival of the American dream for all citizens.

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One thought on “Point-Counterpoint: Closing The Deficit

  • March 11, 2011 at 5:55 pm
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    There are a lot of semantic and mechanical errors in this piece, ones that I did not make. Overall I like the edits–they make the arguments more weighty and direct–but “in order to determining the nation’s priorities”? I didn’t write that.

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