Tuesday, August 9, 2011

A Word About the Debt and Deficit

Connie Mack IVImage via WikipediaDuring the entire debate on raising the country's debt ceiling, I deliberately stayed away from posting anything about the subject.  It had been my hope, though I knew it was not likely, that the idiots in Congress and the White House would do the right thing and actually address the problem of our ever increasing debt.  With the news on Friday evening that Standard & Poor's has downgraded the US debt from AAA to AA+, I want to make a few comments.  S&P has even stated that a further downgrade is possible.

First, the downgrade should not really come as a surprise to anybody.  For months, the credit ratings agencies had been warning that unless the government fundamentally addressed the spending issue they would be in danger of having their credit rating dropped.  Simply raising the debt ceiling so that the country could borrow more money to pay the bills without addressing the deficit issue long term would not guarantee keeping the AAA rating.

The problem with the deal that was reached to raise the debt ceiling and cut some spending really has done nothing to ease the actual problem.  Sure they say they are going to cut over $2 trillion in spending over the next 10 years, but they actually cut nothing.  It is nothing more than typical Washington speak.  The cuts are actually reductions in the rate of spending thanks to the use of baseline budgeting which automatically assumes increases in spending at a predetermined rate.  Even with the proposed "cuts" the debt will still increase greatly over the next 10 years.

As much as Democrats would like to increase revenues by raising taxes, that really is not the answer.  Historically, tax revenues have averaged around 18% of GDP regardless of tax rates.  There have only been a few times when revenue has been above 20% of GDP.  However, government spending is currently running at 25% of GDP.  The real issue is spending, not taxes.  The real way to raise revenue is to grow the overall economy by growth in the private sector, not through the government.

Both sides need to get on board with the idea of balancing the budget.  The rest of us have to do it, most of the states have to do it, so it is the least we can expect from the federal government.  I know from experience that consistently paying for one's obligations with borrowed money is a recipe for eventual disaster.  One of the best plans out there is the one that Connie Mack's penny plan.  The plan call for the elimination of baseline budgeting.  It calls for a 1% cut in actual spending, or a penny out of every dollar in the budget.  That can hardly be called draconian or severe cuts.

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1 comment:

  1. I agree with the cross the board cut. It makes perfect sense and I think there is enough "fluff" spending that could be cut that the money would not be missed. My problem is that when a company is in crisis does the president and rest of the leadership take a 5 week vacation instead of trying to divert financial disaster? Do they honestly think they are doing what's best for their constituents and the country? I know what fat I would like to cut!



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