Wednesday, January 23, 2013

The real Sword of Damocles hanging over our fiscal heads

There is a difference between the real sword of Damocles and a fake one in the fiscal issues before Congress.

The looming fiscal cliff part 2 is as good as plastic, a flexible set of deadlines concocted in the halls of Congress. The sword hanging over our heads is the one wrought in steel that will fall on our necks in the long run: real life, harmful consequences if we do not reduce the deficit. But the swordplay has degenerated to one delay of game trick after another.

The GOP was realizing that their bargaining chip, threatening to vote no on raising the debt ceiling, was about to blow up in their faces because of the dire blowback on the economy if they carried out the threat. The GOP congressional caucus came out of their huddle last week and punted the debt ceiling downfield until the end of March. As an incentive to force a final deal for long term deficit reduction, they made failure subject to a penalty: Congress not getting paid.

Now sequester, government shutdown and debt ceiling will all meet in March madness. The GOP must be hoping that by April Fools' Day, the joke will be on the Democrats because Republicans will have succeeded in making their strategy of calling for spending cuts without being the first to name which ones. Credit the GOP caucus with being clever.

On the left of the spectrum, liberal economists such a Paul Krugman claim that the deficit is not so big a problem, so just ignore it. Economists may ignore it, but the rating agencies did not do so in last year's debt ceiling debacle, and the economy took a dip. Last week, Fitch's rating agency warned that if the debt ceiling is not raised, they would indeed downgrade the country's credit rating.

Most pencil pushers estimate that about 40 percent of the deficit is due to the Great Recession and the resulting decrease in government revenue. Growth will help, but it will not be enough.

The plan on the table that would get the job most thoroughly accomplished is the Simpson- Bowles plan. Both Democrats and Republicans piously invoke their proposal, but they ought to read it. Simpson-Bowles proposed $1.4 trillion cut in defense spending in addition to withdrawal from Iraq and Afghanistan. Other politically hard to swallow recommendations: capping deductions on charities and home mortgages, taxing capital gains and dividends as normal income, and raising Medicare and Social Security retirement ages to 69 by 2075.

Both Simpson-Bowles and President Obama proposed ending Bush tax cuts for earners over $250,000, but to avoid the December fiscal cliff, the President compromised at $400,000. However, he was closer to Simpson-Bowles when he said we must still raise more revenue. Just ending the Bush tax cuts to the wealthy and cutting spending was not enough to reduce the deficit.

The president in his inauguration speech Monday addressed the need to reduce the deficit and revamp our tax code, but still we must “care for the vulnerable.” He used the term “reduce,” which sets a goal of degree, not a matter of complete elimination.

Since Simpson-Bowles, a degree of progress has been made. Richard Kagan at the Center of Budget and Policy Priorities explains, “Congress passed $1.5 trillion of spending cuts in August 2011.” If you take out the recommended cuts that are already enacted, getting to the “how much” is not as difficult as the GOP claims.

The political hang-ups are the “what” cuts and “who” will take the blame for cutting defense spending and for tinkering with Medicare, Medicaid, and Social Security. While both houses of Congress delayed the game in 2012, this time the GOP has delayed the penalty while deserving the penalty flag.
This is my column in the Sky Hi Daily News today

For more, go to  www.mufticforumespanol.blogspot.com


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