A refreshing viewpoint on our current debt ceiling impasse is offered by Richard Phillips over at Stephan Richter’s The Globalist, arguing that the need to give the government a freer hand in spending now in exchange for a stricter discipline later may in fact be the optimum solution to the problem. This is hardly a new suggestion, but the purveyors of this message so far have managed to freight their arguments with class warfare calls to action and distorted statistics that immediately dismiss any serious consideration by even the most conciliatory conservatives.
Phillips is one of those shadowy figures who lurk outside the public view in the inner circles of global finance. If he lived in Zurich, we would call him a gnome, although at 6’4″ he is actually not very gnomish, and, when he did live in Zurich, he largely confounded the Swiss.
(Richter himself is another interesting character – a native German who chose deliberately to live in D.C., which we had thought an impossibility, whose passion for political and social pragmatism is only slightly greater than the intellect he brings to the discussion, which is considerable.)
Of course spending needs to be constrained, but the far more urgent need is for the U.S. economy to begin generating revenues again. This means that austerity has to be put on hold while a robust recovery is allowed to take root. Instead of looking to cut, cut, cut, the federal government needs to look at ways to grow, grow, grow. Accordingly, kicking the can down the road may just be precisely the right policy prescription in the current environment.
Phillip’s arguments are cogent and accurate, but the real problem is one of trust. Conservatives fear that any compromise on “revenue” (i.e., taxes) gives liberals a wedge to continue “tax and spend” frivolity, but they themselves are unwilling to unwind huge subsidies to things like ethanol and sugar. The Bush tax cuts to the entire nation are deliberately characterized as “tax cuts for the rich.” It seems even to us, hardly social engineers, that it is almost essential for government spending at this point to increase, but this can only happen if conservatives are convincingly reassured that serious steps will be taken after a real “recovery” to rein in spending and reduce deficits at national state and municipal levels. Doing this is obviously difficult in practice, or it would have been negotiated already. Further, the tendency of both sides to demonize the other and resort to cant and dogma fogs the debate and wastes time on trivialities (“luxury private jet tax”).
Phillips is quite correct, however, in asserting that throwing the country into a de factor freeze right now will create a great deal of avoidable damage, and slow the recovery so significantly that millions of households will suffer substantial — and unnecessary — damage to their future:
Of even greater concern is that this dynamic will precipitate declines in government revenues, as fewer workers employed results in decreased consumer spending, weakened overall economic activity and, in the end, less collected in taxes. Lower tax revenues will widen the federal budget deficit even in the face of austerity measures designed to constrain it, as will spending on automatic stabilizers such as unemployment insurance.
The reality is that “America doesn’t have a spending problem, it has a revenue problem.” [Ed. Note: Well, here we have to disagree. Certainly we have a “spending “problem; that’s what got us into this mess in the first place] In the 2008 fiscal year, the last full pre-recession year, federal tax revenues totaled $2.524 trillion, according to the Office of Management and Budget (OMB). In the 2010 fiscal year, the first full post-recession year, federal tax revenues totaled $2.162 trillion. This amounts to a decline in revenues of nearly 15% due largely to the recession.
But Phillips’ most convincing argument is hard, even for die-hard small government conservatives, to dispute.
Add to this the shortfall in revenues of roughly $400 billion per year caused by the Bush tax cuts, and you get a vivid picture of America’s revenue problem. Combined, these two factors account for over two-thirds of the current federal deficit. With these revenues restored, the current U.S. budget deficit would be less than 3% of GDP — a level considered acceptable, even desirable, by the world economic community.
Refreshingly free of the standard rhetoric, closely reasoned and, as usual from this source, charmingly brief, calm and rational, Phillips’ argument may not meet with your agreement or your approval, but it is very hard indeed to disagree with many of his points and perceptions. We seriously suggest you read the whole thing.