As I have been saying the solutions are there to bring our country back to strength. One of them is reforming the tax code into a national sales tax called here Value Added Tax. Major economists have all told the government how fair this is, and how much more the government would bring in. The issue, no one at the political level wants to lead on this one. As always, lack of leadership.
Does The U.S. Really Have A Fiscal Crisis?
By Simon Johnson, The Baseline Scenario, 24 February 2011
The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overindebted countries typically have a hard time financing themselves when the world becomes riskier – yet turmoil in the Middle East is pushing down the interest rates on US government debt. We are still seen as a safe haven.
Yet leading commentators and politicians today repeat the line “we’re broke” and argue there is no alternative other than immediate spending cuts at the national and state level.
Which view is correct? And what does this tell us about where our political system is heading?
Our main fiscal issues are three (see my testimony to the Senate Budget Committee earlier this month). The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-08. The ensuring recession and associated loss of tax revenue will end up pushing up our government debt, as a percent of GDP, by around 40 percent. Very little of this debt increase was due to the fiscal stimulus.
The financial system poses a major risk to our fiscal outlook over the next few years. Unless you think that the Dodd-Frank reform bill really ended “too big to fail” and the associated excessive risk-taking culture, you should worry a great deal about the boom-bust-bailout-fiscal damage scenario that the Bank of England now refers to routinely as the “doom loop”.
Of the national level politicians now pushing for spending cuts, almost none showed up to fight to contain the fiscal risks posed by our largest banks. The Brown-Kaufman amendment to Dodd-Frank – which would have placed a limit on the size and debt (relative to equity) was supported by 33 Senators, only a handful of whom were Republican.
But, then again, the Obama administration also fought hard against Brown-Kaufman. Treasury Secretary Tim Geithner argues that the TARP bank bailouts will end up costing the tax payer very little. He is forgetting the broader fiscal damage done by the collapse of the real economy and the loss of 8 million jobs.
Second, we need to control healthcare spending as a percent of GDP. The issue is most definitely not about cutting the current level of such spending or immediately reducing the benefits in Medicare (although if you have ideas for that, send them along). But in the projections, by 2030 or 2040, the growth of healthcare spending ruins us all – whether or not we get the government to pay for it.
During the healthcare debate of 2009-10 there was very little attempt to explain this issue and discuss the options. The administration made a half-hearted move in this direction but backed away as soon as leading Republicans began to claim there were “death panel” proposals on the table.
Third, our tax system is completely antiquated. For the same level of tax revenue relative to GDP, we could greatly reduce the distortions (e.g., disincentives to work) just by modernizing. The right and the left agree we should tax consumption more and income less, but neither is willing to make any kind of meaningful move towards a value added tax (VAT).
The right seems afraid that this tax will be too effective and power an expansion of government. The left thinks a VAT is necessarily regressive (imposing more burden on poorer people), despite all the evidence that the impact of VAT depends on how it is designed – because you can choose what gets zero taxes (e.g., baby clothes) and high taxes (e.g., yachts).
The only room for bipartisan consensus here seems to be what we got in December 2010 – a big tax cut. Cutting taxes is nice, but only if it is consistent with keeping the budget on a sustainable path.
How does the Republican initiative to cut spending fit in with these budget issues? Not very much is the generous answer. Their proposed cuts at the federal level are for discretionary nonmilitary spending, but this is small as a percent of the budget (and therefore of the economy).
But the problem here is bipartisan – as it was with the tax cut last year. None of the leadership on either side is willing to talk openly about how our biggest banks caused great fiscal damage. No one is willing to explain why our healthcare costs continue to rise. And no top politicians currently champion real tax reform.
The Republicans have seized a moment. To them, this is not really about fiscal responsibility; this is about an opportunity to shrink the size of government.
But the Democrats have played perfectly into their hands. The heart of their mistake was the president’s refusal to explain clearly how the financial system produced a recession that has pushed up our national debt.
Both sides of our political elite have contributed to the sense of fiscal crisis. And as we continue down this path – dangerous big banks, out of control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending, and irresponsible rhetoric on both sides – we are well on our way to a real crisis.
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.