Gang of Six Are Most in Line With American Public Opinion on Debt Ceiling Resolution
Since March 1962, the debt ceiling has been raised 74 times (Congressional Research Service). Ten of those times have occurred since 2001. What makes this time so significant is that it has turned into an especially contentious political dogfight. Indeed, we have never come so close to breaching the debt ceiling with no certainty that it will actually be raised.
Just about the entire nation, outside of the Tea Party, believes that not raising the debt ceiling will be disastrous for our economy and that of the world. This thinking has come from Secretary of the Treasury Timothy Geithner, Federal Reserve Chairman Ben Bernanke, Wall Street experts and CEOs, and even our politicians.
It is clear that when the federal government enters a technical default on its loans, the trustworthiness of the US government is brought into question. A default would cause the market to perceive risk on behalf of the US government, and this risk would translate into higher interest rates and, more than likely, a drop in the perfect AAA bond rating of the United States. The increase in interest rates, which will work to reverse the efforts of the Federal Reserve to reduce interest rates over the short and long term through quantitative easing, will have ripple effects throughout our economy. Not only would we be increasing the interest payments on our debt, making our debt a bigger burden then it already is, but we would also be reducing the amount of money that private businesses invest in their companies. Tack on the fact that all this would run the housing market even further into the ground, and default begins to equal economic calamity.
Another very important factor to consider is that when the government can no longer pay its obligations, the government will have to pick and choose which bills to pay. To see how real and problematic this concern is, watch this video from CNN about the findings of a Washington bipartisan group. Paying for military and military contractors, maintaining Social Security, Medicare, and Medicaid, as well as paying for education, federal worker salaries, etc. is impossible. Choosing which ones are most important is a choice I think that most would not want to make.
President Obama has been holding out for a big plan that takes a balanced approach involving cuts to spending, including reforms made in entitlement spending, and increasing revenue by eliminating subsidies and closing tax loopholes. Obama and Eric Cantor, Majority Leader in the House, certainly had it out recently after Cantor decided that he was no longer seeking such a deal. Obama then claimed that he would take this to the American people. But is that a successful strategy?
Most recent polls suggest that the answer is yes. According to a CBS News Poll released July 18th, 66 percent of Americans say an agreement to raise the amount of money the nation can borrow should include both spending cuts and tax increases. So how has Capitol Hill responded to the desires of the American people?
The Senate’s Bipartisan Plan- Created by the Gang of Six
The Senate seems to have taken the most appropriate response in this budget battle, coming up with a plan that is most in line with what the American people want and one that would be considered a “credible” plan along the lines that the President has established. This plan would trim about 3.7 trillion dollars off of the federal deficit over the next ten years, and it would do so by taking a balanced approach. It would include spending cuts that are difficult for Democrats, including changes to entitlements, and would include the raising of some revenue by closing tax loopholes and eliminating tax subsidies, usually a difficult proposition for Republicans. Here are just some of the ways that Congressional leaders and the President hope to reduce the deficit over the next ten years, as compiled by Time:
-$1-1.3 trillion in cuts to discretionary spending, including $400 billion from the Pentagon’s budget
-$150-275 billion: cuts to farm subsidies, spectrum sales and other mandatory spending, such as requiring federal workers to put in more toward their pensions
-$200-$400 billion: cuts to Medicare and Medicaid providers
-$325-$350 billion: interest savings
Total: $1.7 trillion to $2.3 trillion
-$290 billion: capping mortgage and charitable deductions at 28% for individuals who make more than $200,000, or couples who make $250,000
-$60 billion: eliminating last-in-first-out (LIFO) accounting for businesses
-$45 billion: eliminating oil and gas subsidies
-$20 billion: treating as regular income the “carried interest” rate most hedge fund managers are taxed at
-$3 billion: eliminating tax breaks for corporate jet owners
-$2.5 billion: eliminating ethanol subsidies
-$1 billion: eliminating tax deductions for yachts and vacation homes
-$162 million: eliminating tax break for racehorse owners
Total: $422 billion
Clearly this is not all of the savings that can be achieved, but these are some of the most commonly proposed changes to the budget that we have seen over the last few weeks and months.
Republicans Contend With Revenue Increases and Argue For Jobs
While this seems like a credible plan, and is one that Americans would favor, many Republicans have already promised that they will not vote for any plan which “raises taxes.” By eliminating some of these loopholes and subsidies, they would be doing just that. The reason for this is that most Congressional Republicans have signed a pledge with the famous tax fighter Grover Norquist saying that they will not vote to increase taxes during their term in office. Certainly, Republicans that have signed this pledge can’t easily back out now, especially because they will lose their credibility and because Norquist, the Tea Party, and potential electoral challengers are certain to try to make an example of anyone who does not hold the line on this issue.
The Response of the House of Representatives- “Cut, Cap, and Balance”
While the Senate is working on a bipartisan basis, the Republican led House has taken a much different route. This route is to pass a bill that would “cut, cap, and balance” the federal budget. This bill would cut spending in the short term from the budget, cap spending at 18 percent of GDP in the medium term, and then begin the process of inserting a Balanced Budget Amendment to the Constitution.
Let us first consider the argument that many have made that this bill calls for the same reforms that so many states have made. Supporters accurately point out the 49 out of 50 states have balanced budget amendments. I would contend that this balanced amendment is a very bad idea for our nation, and is unlike just about every reform passed by the states that they make this claim about. This amendment to our Constitution would be an extremely strict regulation on the operation of our federal government because it would require a 2/3 majority just to pass a revenue increase or to spend beyond the limits established in the bill. What would we ever do in times of war, like now, or in times of economic difficulty, like now? Good questions. Also, the BBA’s of most of these 49 states are nothing like the one in this bill. Only a few of these states cap the spending of their state, and only some of them have supermajority rules as strict as the 2/3 majority rule on the federal level. Only 7 states actually have both. One of these is California.
If anyone knows California politics well, they will know that on a yearly basis, California has to avert a shutdown. They are the leading example of fiscal irresponsibility. What has a balanced budget amendment and budget cap done for them? Nothing. Why then would we want this failed plan to be implemented on a federal level?
Finally, on this bill, I would add that the cap of the federal budget at 18 percent of GDP is not a practical solution to our problems. Current spending levels are at 23 percent of GDP. Even Reagan’s budget was up to 22 percent of GDP. We have not been at 18 percent spending levels since 1966. My point is that this bill is a political statement and an unreasonable solution to our problems.
What We Need From Our Leaders/ Who Will Americans Blame if We Fail
What we clearly need from our leaders is a bipartisan solution. I am encouraged, despite their many mistakes, that the President and Speaker Boehner are for the most part holding out hope for a better and bigger deal. I am discouraged by Cantor and others who wish to derail such attempts and seek to invoke partisanship into a problem that America must collectively deal with.
We know who Americans will blame for this if we fail to raise the debt ceiling. David Brooks, a Republican columnist for the New York Times, says that Republicans will be blamed if they continue with their unwavering ideology in an article he wrote recently. David Frum, former economic speechwriter for former President Bush, even says in a recent article that Republicans will be blamed for not compromising with the President and for standing up for indefensible tax breaks and subsidies.
According to the latest ABC News poll, 48 percent trust Obama to handle the debt debate while only 39 percent trust congressional Republicans. 58 percent say the president hasn’t done enough to compromise on the deficit. 77 percent say the same about the Republican leaders. It is clear who will receive a relatively larger part of the blame if there is not a resolution on the debt ceiling issue.
Americans don’t want to see people dig in their heels on entitlement reform or tax reform. Some, like Tim Pawlenty, pray that our leaders don’t raise the debt ceiling. While I admit that I am not usually one to bend a knee for political fights, I am praying for the opposite.