A Lose-Lose-Lose Situation: Washington Pursues Wrong Set of Policies in Debt Ceiling Debacle

President Barack Obama meets with congressional leaders in the Cabinet Room of the White House on July 13 to discuss ongoing efforts to find a balanced approach to the debt limit and deficit reduction.

Facing the first default in the nation’s history, President Barack Obama punted on large-scale fiscal reform earlier this month by adopting an anemic package of discretionary spending cuts in exchange for raising the debt ceiling, which placed the nation’s credit rating in jeopardy. The only positive aspect of the deal is that it averts a default – and that is it. No action was taken to raise revenues, nothing was done to cut entitlement spending on Medicare or Social Security, and nothing was done to prove to the American people that Congress is capable – or even willing – to address the really big problems that burden the nation.

The plan outlines at least $2.1 trillion in cuts over the course of the next decade, with $900 billion taking effect by January 2013 and at least another $1.2 trillion to follow unless the newly formed supercommittee can come to an agreement – which is unlikely – before the end of the year. So not only did this deal not address our long-term fiscal woes, it actually slows the recovery at a time that job growth is imperative.

With the nation still reeling from the 2008 housing bubble collapse, stimulus spending is needed now more than cuts. The cuts may only amount to around 1 percent of GDP but that is still enough to keep economic growth at a measly 2 to 2.3 percent through election day 2012, according to the Congressional Budget Office.

What makes this situation even worse is that it could have been avoided entirely last December when the Bush tax cuts were extended. A deal could have been easily negotiated between Obama and House Speaker John Boehner to raise the debt ceiling in exchange for an extension of the tax cuts that occurred anyway. Instead, brought to the brink of economic collapse by Republican intransigence, Obama capitulated once again to Republican demands. This dire situation should have galvanized both sides of the aisle rather than lead to the hyperpartisan standoff that ensued.

Unfortunately, like a child throwing a temper tantrum in a supermarket aisle, the Tea Party got nearly everything they demanded. In politics, you’re never supposed to take a hostage that you’re not willing to shoot. In this case, the hostage was the American public, and the Tea Party appeared more than willing to pull the trigger.

There is not a dearth of good ideas in Washington; there is just a lack of political will. Since the Bowles-Simpson Commission published their findings, the bipartisan “Gang of Six” in the Senate had been working to turn the commission’s suggestions into comprehensive, balanced legislation. Everyone knows what the deal should have looked like:

  • An extension of the payroll tax cut.
  • Creation of an infrastructure bank to pool public and private capital for projects that will put Americans back to work.
  • An increase in the Social Security and Medicare age requirements to at least 69 and change the progressivity of benefit formula so the wealthy do not reap the same benefits as the more disadvantaged.
  • Also, an increase on the Social Security contribution ceiling so taxes can be collected on wages over $106, 800.
  • Cut corporate taxes from 35 percent to 25 percent while reforming the tax code to eliminate loopholes.  Just by eliminating the loopholes you will see a net revenue gain even while cutting corporate taxes. Lowering corporate taxes will entice American businesses to bring back billions of dollars in repatriated earnings from overseas, which would increase the pool of taxable income. It’s a win-win situation.
  • Follow Warren Buffet’s suggestion and increase the personal income tax on individuals making more than $200,000 per year, including taxes on capital gains. By allowing the Bush-era tax cuts on just the wealthiest 2 percent to expire, the U.S. government would collect $700 billion. Regardless of what Republicans say, that is a lot of money.
  • Offer down payment assistance to at least 1 million qualified prospective homeowners because more than 3 million vacant homes remain on the market. A housing bubble created the recession, and it will not end until excess supply in the housing market is reduced.
  • Reduce farm subsidies by at least $3 billion per year.
  • Reduce military bases in Europe and Asia by at least 33 percent.
  • Reduce defense procurements by at least 15 percent starting in 2013.
  • …and hundreds of other cuts.

However, none of these suggestions were adopted by Congress. The mix of austerity measures that were passed will only slow the economy and lead to further partisan bickering.

Since the end of the Clinton presidency, Washington has pursued the exact opposite remedy of policies. From 2000 to 2008, when America should have been tightening its belt – increasing interest rates, taxes, and requirements for purchasing homes – they didn’t. Now today, when they should be stimulating the economy, decreasing taxes, and lowering interest rates, they can’t.

In most instances, when Nancy Pelosi and John Boehner vote on the same piece of legislation, it means a bipartisan deal was reached that is beneficial for the American public … well not in this case.

One Response to “A Lose-Lose-Lose Situation: Washington Pursues Wrong Set of Policies in Debt Ceiling Debacle”
  1. Nhan-Fiction says:

    You make politics very understandable. Great piece.

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