Monday, April 16, 2012

'Americans always do the right thing - after they have tried everything else.'

The budget has been an ongoing divisive debate in which all parties recognize deficit reduction is the 'right thing' yet insist on dragging the country through the ringer of all other options before the inevitable is enacted. As we approach Jan. 1, 2013, the delayed date of infamy when all the 'solutions' Congress has put forth to address the deficit are due to finally take effect, it is unclear how the Congress will act. If precedent holds, Congress will likely be dragged there kicking and screaming.

An interesting article from Investment Week looks at how America's Congress has fought tooth and nail over the last several years to avoid addressing the nations ever growing deficit. The article cites the deficits growth from 3.2% of GDP in 2008 to 8.7% of GDP in 2011. Nonetheless, the British news outlet has faith that we will make it -- begrudgingly -- out of our current economic state. Quoting Winston Churchill in saying "Americans always do the right thing – after they have tried everything."

Regardless of if Obama wins in November, he may still face a lame-duck session if Republican gain control of both houses in Congress. Perhaps divided government is just part of our American political system. However, at a time when so much is at stake and our nation is crying out for an efficient and effective federal government, such continued division and gridlock may prove disastrous. All we can hope for is that Churchill holds true and that we manage to try out "everything" sooner rather than later.


  1. I really, really can't stress the point enough that comparing deficits from 2008 to 2011 is wildly misleading. GDP has fallen drastically, because we're in a recession. And a good bit of history shows that, unless you can compensate with monetary policy, the worst thing to do in a recession is cut spending, as it just lowers GDP further. Look, for example, to Spain, a country that was running a budget surplus before the recession, but was hit hard by the recession. The EU demanded budget cuts (and other measures), and unemployment remained around 25%. Now they're almost on the edge of default, and with each cut in the budget their deficit has perversely increased. Budget cuts in recessions are, if not self-defeating as former Clinton economic advisor and Harvard President Larry Summers has argued, at the very least close to it. The economy needs to be fixed first, and in spite of the scary sounding numbers our debt has not affected our ability to raise money at all, nor does it seem like it will in the medium-term of 5-10 years Then, the long-term issues of debt, especially health care, the military and tax reform, need to be dealt with.

  2. This is a very fitting quote to describe modern American politics. It is difficult for congress to come up with a real and pragmatic policy solution on their own time. They must have exhausted all other options, or be faced with an impending crisis as was the case with the debt ceiling deal. However, a recurring concern with this style of governance is what happens when the policy response lags too much and it does not alleviate the problem effectively. I fear this is the case with the deficit struggle. It will only be dealt with at a point where we have already mortgaged our future away and there is no turning back.

  3. Fortunately, a do-nothing approach for income tax policy will result in pre-2001/2003 Bush tax rates that aren't exactly desirable for either party. Thus, our legislators won't have to try everything, or anything, for some action to be taken to address our growing deficit. If such an "inaction" occurred, the tax rates would change as follows: 10% rate collapsed into the 15% rate; the 25% rate raises to 28%; the 28% rate to 31%; the 33% rate to 36%; and the 35% rate will become 39.6%. With higher tax rates for all brackets, revenues would rise and our deficit would fall. Maybe, just this once, we should hope for foot-dragging and last-minute deals in hopes that a compromise isn't reached in time. Then maybe we can begin to address our deficit, either with the default tax rates or by lowering the new higher taxes (in essence a tax cut) to levels still greater than Bush era levels.

  4. We have discussed in class the great extent of potential ramifications should our country not find a viable solution to the growing budget deficit. I tend to agree with Harry, in that, drastically cutting spending across programs would be ill advised and yield red flags as our deficit continues to inflate in relation to our GDP. However, that is not to say that responsible spending and minor cuts would not help move the pendulum toward a more balanced state. I feel the best first step would be to increase our government’s revenue via the expiration of the Bush tax cuts, and, more importantly, a stingier corporate tax program. Corporate taxes generate only (about) a quarter of the amount contributed by individual income taxes. In actual collection of corporate taxes (as a share of GDP), the United States collects less than 24 out of the 26 industrialized countries, and thirty of the country’s most profitable companies had a negative tax rate between 2008 and 2010. Instead of cutting spending, perhaps we should extract from out country’s largest untapped resource.