On a Grand Bargain to Avert Debt Crisis

[Pearce Godwin]

Note: It's been eight months since I last wrote on Election Eve. I had
the engaging of Chrissy to take care of immediately after the election
and have been rather busy since then. I look forward to writing more
frequently as Election 2012 comes into focus. It's only 487 days away!
In the meantime, follow my political thoughts on Twitter,
@PearceGodwin.

Ongoing discussions taking place between the White House and both
parties in Congress aimed at finding a solution to raise the debt
limit, which America will breach on August 2nd, and returning to
fiscal sanity by reducing out of control federal spending have taken
an optimistic turn in recent days. As per usual, politicians only get
serious and truly come to the table at the 11th hour with their feet
to the fire. Reference the deal to avert government shutdown in April.
This is true of any opposing parties involved in high stakes
negotiation. With their backs to the wall, a compromise tends to
result. We see this playing out again as the President reported
Thursday that Democrats and Republicans are now coming to the table
"in a spirit of compromise" and had "a very constructive meeting"
realizing that "there is going to be pain involved politically on all
sides." There is no bigger issue facing the U.S. today. If we don't
solve this debt crisis and reign in our spending binge, we won't have
an economy worth being employed in, never mind one that leads the
rapidly evolving and globalizing world.

In light of these developments, I sent the following message in a
series of tweets Thursday.

@PearceGodwin: Hoping for a grand compromise in order to take bold and
decisive action to pull our country off the financial precipice of our
national debt. As much as I favor slashing spending to raising taxes,
afraid ruling out half of the balance sheet equation won't cut it. All
remedies must be on the table to avert true economic crisis which
could cripple America's financial stability and global stature.

Reaction from my conservative Republican friends was swift and
provoked a great discussion on spending, taxes and debt. This is
exactly the kind of honest and comprehensive discussion I hope is
taking place on Capitol Hill and in the White House now. Read the
discussion below and then weigh in. Offer your thoughts in the
comments section or on Facebook and Twitter, where it has played out
thus far. This is what collective problem solving is all about. In
this case, the future of America depends on it.


Eric Zulkosky:
Come on, bro. We can't be raising taxes during a recession! Federal
budget increases of 20% or more for each of the past two years is
simply not sustainable. Just go ahead and say it...you're supporting
tax increases.

Larry Shoemaker:
I can tell you from the business side if you raise taxes on business
or business owners, businesses will not increase hiring. Will likely
decrease employment. Until businesses have some assurance about taxes
and regulation, they are not going to expand-too much risk. Texas
created more than half of all new jobs. Look at their taxes, tort
reform, etc.

Pearce:
Eric, you know I would cut every last ineffective, inefficient and
unnecessary government program before even thinking about tax
increases. Drastically slashing spending must be priority #1. I just
think trying to solve a problem this dire and of this magnitude will
unfortunately require looking at both sides of the balance sheet
rather than taking an unequivocal hard line to solve our debt problem
with one hand tied behind our back. Any way you slice it, tax
increases, first via efficiency reform and closing loopholes rather
than rate increases, will get us to fiscal solvency faster when added
to the X that is the amount cut. We must balance the need to turn the
ship around fast with the deleterious effects we know any tax increase
will have during a recession. We absolutely should not raise rates on
job producers, including the "millionaires" who represent many small
business job engines, at a time of such high unemployment. My point is
that given the practical reality that we can work both sides of our
red ink to reduce the debt faster, it is a conversation worth having.

Pearce:
Larry, agreed, can't punish the job creators, must find any new
revenue elsewhere. Excellent example of a conservative vision
promoting real growth and job creation. Obama should notice that fact.

Eric:
You can't balance the budget over night, but meaningful, incremental
progress will avert a disaster. Can you tell me what is or how you
define "tax loophole"?

Pearce:
When I say tax loophole, I'm not taking the negative connotation of an
unintended escape hatch. I'm talking about exemptions, deductions and
subsidies, some hardened on the books due to robust lobbying and
archaic logic. We should take a fresh look at these and only give such
breaks when it advances our economic and national interest. They are
an important incentivizing and market shaping tool but should be
wielded carefully under such a debt crunch. Eliminating some of these
out of date or unwise tax breaks would increase our revenue without
raising rates at all, especially in sensitive areas critical to
recovery, which of course in and of itself will increase tax revenues.

The GOP was right to anchor our negotiating position at the hard line
of no tax increases, period. I understand tactical negotiation.
However, we all know that neither side is going to lay down and die.
Dems have the Senate and White House so must get enough out of the
deal to win over Obama and four Democratic senators (or three plus
Biden), unless of course we're talking about a supermajority to break
filibuster. Therefore, changes to the tax code can't be dismissed out
of hand as part of an honest and comprehensive discussion of the
issue. If the President is genuine in pushing his caucus to go big in
putting entitlements, the biggest components of this crisis which
cannot remain untouchable if we are to solve it, on the table, it is
fair for us to consider the appropriate level of taxation and subsidy
as well. Whatever it is now, isn't perfect, so we should seek to make
improvements that will expedite budget balance, promote recovery and
strengthen overall economic health.

Eric:
While I appreciate the fresh, centrist tone you posit, I'm afraid the
policies you're advocating will have a similar effect on the economy
as raising taxes during a recession--which you defacto support.
Unfortunately the unemployment rate ticked back up to 9.2% today, a
rate that should have been, at the very least, sub-8.5% by now
according to our Vice President. That said, the word "subsidy" is just
another way of saying "tax credit" as you note and millions of
businesses and individuals, both parents that send their kids to
college and homeowners that write off their home mortgage interest use
these "loopholes" as you refer to them, which incent certain economic
activities our government has historically said it supports. Sure we
should take a look at them when our economy is back on track, as we
should do for every regulation on the book to ensure we don't impede
job growth and business activity, but make no mistake about it,
eliminating most of these "loopholes" will translate into higher costs
for consumers as you learned in Econ 101. If the Dems pass cap-and-
trade, then you can expect your electric company to pass the
additional costs along to you the consumer in the form of higher
electricity rates. The same holds true for most other federal cost-
raising activities. I am not certain our economy can handle a fresh
impetus for rising consumer prices, especially considering
inflationary pressure from the record spending sprees of the past is
really starting to take hold and will suppress consumer spending and
thus broader economic growth. Let's just be carefule for we aren't out
of the woods yet. We can and must pay down the debt without raisng
taxes on job producers and consumers.

Chris Mike:
Compromise = lose.

Pearce:
Chris, I disagree that compromise = lose. The Constitution set up a
system of government that, because the American people prefer and vote
for split government between Democrats and Republicans, requires
compromise to pass legislation. There are certainly core principles
which should never be compromised, but there is often a vast playing
field between the two sides' core endzone positions ripe for
bargaining towards a mutually agreeable-enough-to-pass solution. I
prefer to think compromise = progress. A stagnant, paralyzed federal
government incapable of promoting national interest (i.e. something
akin to what we have now) = losing.

Eric:
Yeah, but remember that Republicans only control one chamber of
Congress and not the White House. It's not exactly a level playing
field, yet at least.

Pearce:
Eric, sounds like our only point of disagreement is the timing of said
fresh look at tax credits. Many such credits are prudent and wonderful
tools which encourage the invisible hand of incentives among "selfish
actors" in the economy, promoting positive choices such as college,
home ownership and business expansion. That said, I'm quite sure there
are some which are out of date or otherwise unnecessary that are
keeping dollars out of our federal account which could be used to pay
down our debt and reduce dependency on foreign nations.

Unfortunately, it seems Washington only acts when our feet are to the
fire. Right now, our feet are to the fire on the debt limit.
Therefore, I see this as a perfect time to pursue every opportunity
for correcting and improving the financial mess we've created,
including in the bloated tax code. We should not leave any stone
unturned at this rare moment of receptivity to bold action on both
sides of the aisle.

Any direct or indirect increase in taxes will indeed have an adverse
impact on the affected consumers thus depressing economic growth to
some degree. That is a cost to reform, a particularly high one in a
time of recession toward fragile recovery, but it must be weighed
against the long term benefit of tax reform at a moment of possibility
to take such action which we may not see again for a very long time.

Eric:
There's little we can do to ensure these spending cuts are adhered to
in the future, given annual consideration of appropriations bills.
Once the President gets his tax increases, those are much harder to
roll back. Any way you want to message it you're advocating for using
this "perfect time" to raise federal revenue on the backs of
businesses, consumers and other "selfish actors" as you call them
during a recession. I know your message has probably polled well in a
Facebook focus group, but be careful about who your audience is. We
can eliminate our debt without increasing costs to consumers.

Pearce:
Important point on the permanency of the remedies proposed and
potentially accepted by each side. Constitutional amendments to
balance the budget have been discussed but, as you know, would only
become an excuse for raising taxes rather than cutting spending down
the road. We cannot raise any tax, including the elimination of
credits, with any hope or expectation that the move will be reversed
in the future. Therefore, such moves should only be supported if we
believe they are good permanent fiscal policy. We cannot fall for the
ruse of a temporary tax increase to address the deficit. Not only is
this the worst possible time as we "tread water at the bottom of a
very deep hole," but, as you point out, there is no more a temporary
tax increase than there is a temporary spending increase. That's how
we got into this mess. Taxing and spending gone mad over the last
decades. And yes, Republicans are rightly blamed for part of this
plague, however nothing in comparison to the way in which Obama has
floored it towards the cliff.

To be clear, I am not advocating for raising federal revenue. I am
advocating for allowing the idea to be part of a comprehensive and
exhaustive conversation to avert a debt crisis and promote growth. The
reality is that their are two numbers which combine to determine our
debt, revenue and spending. There is no doubt about what must be done
with spending, and it must be drastic and it should hurt. Any serious
discussion will also include the issue of revenue; this is that
discussion. There are innumerable problems with raising revenue,
especially now, that anyone with an understanding of Econ 101 should
get. Therefore, it's entirely possible that after considering the
revenue side of the equation, we would rightly determine that it
should not be increased in any way, in order to promote rather than
depress growth. My objection is to a dismissal out of hand of even
considering revenue. That is irresponsible and dishonest. Thoughtful
individuals on both sides consider all elements and then draw firm
conclusions, not the other way around. You, of course, have a full
understanding of both revenue and spending in all of its many forms
and implications, but I'm concerned that some are more interested in
rhetoric and partisan pride than fully assessing and solving this
problem.

Chris:
The real compromise would be to pass some deep spending cuts before we
even start discussing anything else. After all, the Republicans did
just win a historic election eight months ago. Let's see the
conservatives in action! And by the way, you're forgetting Art Laffer
and the fact that tax cuts will boost the economy and raise fed
government revenue anyway.

Pearce:
I love Laffer. His curve is genius yet so logical. Under the premise
that we are at a state of general over-taxation, you're right, leaving
more money in people's pockets will increase spending and thus tax
revenues. That's why the Christmas deal to extend the Bush tax cuts
was positive. Conversely, raising taxes beyond the optimal point will
actually depress revenues as Americans stop spending and producing to
generate the wealth that is taxed. Not forgetting him. Laffer's
concept should be a major component of this comprehensive discussion.

http://www.pearcegodwin.com/2011/07/on-grand-bargain-to-avert-debt-crisis_473.html