Coop's Corner
April 9, 2010 7:19 PM

Raise Taxes, Cut Spending - or Both?

By
Charles Cooper
Topics
In The News

Paul Volcker, chairman of the President's Economic Recovery Advisory Board. Is there a VAT in his (and your) future?

(Credit: AP Photo/J. Scott Applewhite)
Somebody finally got the memo: Dow 11,000 notwithstanding, things will have to change. Won't they?

Against a backdrop of ballooning deficits, soaring entitlement costs and an ageing population, the new conventional wisdom is that hard choices are around the corner. Of course, that doesn't mean anything's going to happen but there's a new meme in the neighborhood. In the last week, three influential voices in economic matters have sounded off on why big course corrections are due sooner, rather than later.

Otherwise, Greece, here we come.

Federal Reserve Chairman Ben Bernanke said that it's going to come down to a question of cutting entitlements or jacking up taxes. Here's the money quote:

The arithmetic is, unfortunately, quite clear. To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above. These choices are difficult, and it always seems easier to put them off--until the day they cannot be put off any more. But unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.

Former Fed Chairman Paul Volcker used an address to the New York Historical Society to float the possibility of a value added tax (If there's a need to raise taxes, he said, then we should raise taxes.)

Congressional Budget Office head Doug Elmendorf offered the gloomiest assessment, concluding that the nation's fiscal path is simply "unsustainable."

If Messrs. Bernanke, Volcker and Elmendorf intended to seed a debate in advance of an action by the President and Congress, call this one Mission Accomplished. (Though they got an earful for their troubles. Here's a sampling:)

  • The Heritage Foundation shot down Volcker's trial balloon as "the liberal solution for unsustainable deficits that threaten the stability and very future of our economy."
  • Larry Kudlow, who worked for Volker more than three decades ago, slammed his former boss's idea as nuts. " The last thing we need right now is more tax hikes. There are a dozen new tax hikes already squirreled away inside President Obama's health-care law. Medicare payroll taxes are going to be imposed on capital gains and dividends. Investor taxes are going way up when the Bush tax cuts expire at the end of this year. And to top it all off, half the states in the country are raising taxes."
  • National Review's Daniel Foster titled his post "Doug Elmendorf's Brain in a Vat."

The federal budget deficit in the first half of fiscal 2010 was $714 billion. That's about $67 billion less than the year-earlier period, but that's a reflection of a sharp drop in outlays for the Troubled Asset Relief Program as well as a fall in spending for federal deposit insurance. That was the good news. Here's the not-so-good news on spending:

  • Unemployment benefits: Up $39 billion, or 83 percent

  • Medicaid: Up $17 billion, or 15 percent

  • Social Security: Up $23 billion, or 7 percent

  • Medicare: $12 billion, or 6 percent

  • Net interest on the public debt: Up $26 billion, or 31 percent

If the economy's growth accelerates, those numbers become more manageable. In a discussion of Greece's predicament, Paul Krugman notes that the U.S. ran up a federal debt equal to 122 percent of gross domestic product. "Yet investors were relaxed, and rightly so: Over the next decade the ratio of U.S. debt to G.D.P. was cut nearly in half, easing any concerns people might have had about our ability to pay what we owed. And debt as a percentage of G.D.P. continued to fall in the decades that followed, hitting a low of 33 percent in 1981."

But what if the economy doesn't move into 5th gear any time soon? What if we're stuck in 2nd for an uncomfortably extended period? President Obama has appointed a but does anyone expect the members to back the dismantling of the entitlement programs that make up the bulk of the federal budget? Or take a knife to the massive defense budget? (Another sacred cow.) Or raise taxes?

What we also don't know is whether there's the political will in Washington to take the heat. These will be excruciatingly hard decisions. The only certainty is that whoever's ox gets gored will howl at the unfairness of it all.


  • Charles Cooper is an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet. E-mail Charlie.

Add a Comment See all 77 Comments
by JoesephMan February 18, 2011 11:53 AM EST
haha. he said *****.
Reply to this comment
by lt649036 October 18, 2010 1:07 AM EDT
If we do not get serious and pay our current governmental debt, instead of making more debts to get politicians elected, there will not be a United States government as we currently know it [for long].

Few countries have undone nation bankrupting-sized debt, such as the current enormous debt obligations of the United States government [our politicians have made the debt and want to put the blame on others]; however, there are two schools of thought: 1) the Wiemar Germany financial collapse, and 2) the financial re-birth of Chile from the mid-1970s to the present.

I strongly suggest that American leaders [if there are any left who care about keeping our nation financially strong] take a look at how a basket-case like the country of Chile can go from an incredibly over-indebted small country, to a prosperous small nation [a shining example of South American financial success] with a current Chilean governmental debt that is a miniscule percentage of its 2010 GDP.

I am only interested in Chile's economic and financial decisions that have led it to the present prosperous situation, from its distressing economic past in the mid-1970s; however, in no way, whatsoever, do I advocate human rights abuses or corruption. Again, I am only interested in the economic decisions on a national and international basis that led Chile from debt slavery to debt freedom.

The United States of America could do worse than to use the financial model of Chile to get out of its current mind-blowing debt, that is, if anyone in America [politicians or the masses] cares about such things anymore.

Arnold James Webre, Jr.
Reply to this comment
by lt649036 October 17, 2010 11:15 PM EDT
U.S. Congressmen [senators and representatives] and presidents have been buying votes with U.S. credit [using U.S. government debt that has been sold to foreigners for many decades]; and the masses of American people have been getting something for nothing from their Congressmen and presidents for many decades. Both the Democrats, the Republicans, and the Independents are equally guilty of this quid quo pro with the masses of voters, who want something for nothing.

The problem is, soon we are going to have to pay the piper, and it will resemble the financial bankruptcy of the old Soviet Union. Nothing, but nothing, in this world is for FREE.

It is not the fault of poor, middle class or wealthy Americans that the politicians have been buying votes with the credit of The United States, and now our government and our currency is broken. It is interesting that the politicians and the have-nots [masses of voters] who created this national debt and national bankruptcy waiting to happen, are now blaming wealthy Americans who provide jobs to other Americans [along with middle class small business owners, who also provide jobs to Americans].

On the other hand, I do not blame the poor for this problem, as, largely, they are uneducated and have been responding to politicians, who are educated, who have been promising them something for nothing. The poor have been unwittingly duped by educated politicians into setting-up the destruction of America, by selfish politicians, who are more concerned about getting re-elected than they are about the continuance of our democracy.

Only a miracle will get us out of this financial nightmare.

God Bless America!

Arnold James Webre, Jr.

P.S. I am not wealthy or poor, but I do think for myself.
Reply to this comment
by Farahlies April 14, 2010 5:43 PM EDT
I'm not necessarily against the tea party movement, as long as its supporters proceed with eyes wide open.

They are adamantly against taxes.

But do they realize how cutting spending will affect nearly all of them? We're talking 40 trillion dollars.
Standards of living will nosedive. Those who can afford supplemental health care will be ok.
Those who can't will need to go without. Emergency rooms will need to be allowed to refuse patients with no means to pay (Currently subsidized by taxpayers).
I'm not saying we can keep entitlements as they are. Clearly, we can't. But I believe when the No new taxes group starts to feel what spending cuts means to them, they will reconsider their position.
It goes to the core of the debate between taxes and spending. Neither one is inherently evil. Both serve a purpose.
The real discussion is how MUCH government are we collectively willing to pay for in a sustainable fashion?
Reply to this comment
by Mortar_29 April 16, 2010 10:24 AM EDT
Well, the first thing is to ask how much government will ALL OF US be willing to pay for. Not, how much government will we want SOME to pay for.
by Farahlies April 14, 2010 5:27 PM EDT
On how to control the Federal Debt, the survey says only 7% support tax increases, 54% support spending cuts and 37% support a combination.
I'm curious about the population that supports only spending cuts. Do they realize that this means substantial cuts to Medicare? Does it suggest that some 50 million seniors have agreed to accept lower benefits and much higher costs?
That would be terrific!.. But I remain skeptical.. Do they realize how much their entitlements would be lowered? That care will be "rationed" by their ability to pay?
I think that's impossible to avoid at this point, but personally, I'd be willing to pay a little more in taxes to save someone's grandma, if only a few of them.
Reply to this comment
by Mortar_29 April 16, 2010 10:29 AM EDT
Yes, we must cut where it is illegal anyway. Look, living off someone else's property that was taken from them by force and given to you makes you an accessory to theft. And receiving stolen property. If you did nothing to earn that money, and the money was taken from a person (not given to you as charity)...then it is theft.

So, it is time to not only reign in entitlements, but to also move toward a government with no entitlements.

I am not entitled to someone else's property...and no one is entitled to mine.

"I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents." - James Madison

"Charity is no part of the legislative duty of the government." - James Madison

"If Congress can employ money indefinitely to the general welfare, and are the sole and supreme judges of the general welfare, they may take the care of religion into their own hands; they may appoint teachers in every State, county and parish and pay them out of their public treasury; they may take into their own hands the education of children, establishing in like manner schools throughout the Union; they may assume the provision of the poor; they may undertake the regulation of all roads other than post-roads; in short, every thing, from the highest object of state legislation down to the most minute object of police, would be thrown under the power of Congress... Were the power of Congress to be established in the latitude contended for, it would subvert the very foundations, and transmute the very nature of the limited Government established by the people of America." - James Madison
by christophercarr April 13, 2010 11:49 AM EDT
This ultimately is why I am a liberal: my principal goal from government is efficiency. I want my government to be good at maximizing human utility. If that means the market should be brought to bear in many cases, then by all means let the market set prices. When in other issues the market fails, I want the government to step in and nudge things in the right direction. Draconian taxes hurt the economy, but defaults on debt or huge inflation would hurt a lot worse, so lets find a way to raise taxes that hamper economic growth as little as possible. Political dogmatism doesn't interest me, I just want to be right.

http://www.theinductive.com/blog/2010/4/12/liberalism-after-liberalism.html
Reply to this comment
by JoesephMan February 18, 2011 11:54 AM EST
haha.
p.
e.
n.
i.
s.
by omnix April 12, 2010 2:19 PM EDT
Nice expose... It's a bit of slippery slope to the US as the 21st century version of Nazi Germany, but it's obvious the sheeple can be manipulated. I believe a flat tax on businesses about .5% below OECD (without loopholes), revoking tax abatements, and raising taxes on the upper 10% until the deficit has been reduced is the fastest way out of poverty. I've also been looking into implementing a fair-value labor compensation standard, which might be a way to ameliorate the problem with dollar value.

I'm working on a book, and I was wondering if you have any references for this information. Feel free to email me directly at omnix1200 at yahoo dot com.
Reply to this comment
by curse914 April 11, 2010 11:52 AM EDT
by RobAla April 11, 2010 8:04 AM EDT

The spending habits of the federal government is unsustainable even if the economy comes back. Around 19% of the annual federal budget is allocated to pay the interest alone for the national debt. Both political parties are responsible for this by spending irresponsibly. We need adults running Washington, and all we have seen are representatives behaving as children in a candy store for many years. Come November of 2010 and 2012 we need to look for candidates who have a plan to reduce the federal government to a manageable size. This is insanity.

==================

Ok Rob, just remember your Big Government Republicans have run the show for the better part of the past 30 years running up that debt and deregulating the financial sector that raped our economy.
Reply to this comment
by 6591Hou April 11, 2010 11:31 PM EDT
curse914 - The facts are:
http://clerk.house.gov/art_history/house_history/partyDiv.html
The Republicans had the majority in the house from 1947-1949 (79th Congress) and then not again until the 104th Congress through the 109th (1995-2007). So if you understand that the Congress is in charge of the legislation of taxes and spending then the control of the government purse strings has been predominantly in Democrat control for the past 60 years. The Republicans had been in charge of those purse strings for twelve years of the past twenty.
by askagain April 11, 2010 8:27 AM EDT
What happens when a country can no longer sustain its spending habits? Have we become top heavy with spending money on social programs? The simple answer to economic woes is to raise taxes. Whenever taxes are raised, consumers have less money for other things. If our government continues to spend more than we can afford, it will effectively bankrupt us. We need to decide whether we want to continue along the same path or put constraints on our government's spending habits.
Reply to this comment
by brianbwb2011 April 11, 2010 9:25 AM EDT
The answer to your query lies in recent history.

By 1972, the war profiteers had squeezed America for $13 trillion in 1972 dollars, the total spent from Eisenhower through Nixon on an unnecessary genocidal military debacle in South East Asia. This is equivalent to 60 trillion in today's dollars.

The Fed printed money and loaned it to the banks, who were supposed to facilitate the circulation into the economy, but they didn't. They instead used it to play the international currency markets, and lost the game when countries like Germany, Switzerland, France and Singapore, decided to cash in the dollars they held for the gold the dollars were supposed to represent.

America was essentially and realistically bankrupt at that point, because France and Singapore alone possessed more dollars than could be covered by the gold in the treasury.

In August of '72 Nixon, having no choice whatsoever, decoupled the dollar from the gold backing, selling the treasury gold on the open market. You might remember gold went from USD $180 to almost $900 within two months.

The only reasons we did not plunge into a hyper-inflationary spiral, and economic collapse were,

1. Nixon, forced to act against his GOP heart, enacted a rather socialist wage and price freeze on all goods and services, which bought him enough time to,

2. Negotiate with OPEC, convincing them to accept only US dollars in exchange for their oil.

Mind you, even after this fundamental change in the US economic foundation, the US continued to waste money and lives in Vietnam until 1975.

So to answer your question, when the spending exceeds revenue, America has changed the fundamental structure of its economic underpinnings to avoid collapse. A similar change will be necessary soon, as OPEC can do nothing more to check US hyperinflation.

The only answer now is to change again to a dollar based on person-hours of labor. To rebuild, upgrade, and modernize the country's infrastructure, and create full employment, while putting any new money printed directly into the hands of those who perform the labor, bypassing the crooked banks and corrupt contractors, and forcing business actually compete for those new dollars, which Reagan's "trickle down" agenda essentially eliminated.

Any other solution, such as eliminating social programs, while leaving the military corruption untouched, are doomed to fail, because there will be even higher costs associated with dealing with massive civil unrest, emergency health care, and increased crime.

Those advocating eliminating social programs have no answer for the next logical question, what to do with the massive numbers of people plunged into abject poverty as a result of their anti human advocacy.

Likely they have a "final solution" to the problem of the large numbers of poor Americans, a "final solution" that doubtless would be taken using ethnicity as the main criterion, and turning the US into the 21st century version of Nazi Germany.

That will never happen, so the choices are clear, a labor based currency, or total collapse of the US, identical to the collapse of the Soviet Union.
by robham777 April 10, 2010 8:50 PM EDT
Regardless of wheter or not we should have done this or that, the fact is that we are in dire straits. If the economy does not come back in a big way there is no way for the government to sustain the current level of spending. I am afraid that the more creative the government gets in their attempts to raise revenue the worse the outcome will be for job creation and as a result the less revenue will be generated. It would seem to me to be the proverbial catch "22".
Reply to this comment
by RobAla April 11, 2010 8:04 AM EDT
The spending habits of the federal government is unsustainable even if the economy comes back. Around 19% of the annual federal budget is allocated to pay the interest alone for the national debt. Both political parties are responsible for this by spending irresponsibly. We need adults running Washington, and all we have seen are representatives behaving as children in a candy store for many years. Come November of 2010 and 2012 we need to look for candidates who have a plan to reduce the federal government to a manageable size. This is insanity.
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