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My Thoughts on Deficits

We cannot live with them; we cannot live without them. Classical Keynesian economic theory explains that government must deficit spend during an economic recession to restore growth, then run a surplus during boom times to prevent over-heating the economy and stoking inflation. During economic recessions, we need to spend on the unemployed and cut tax rates for those who promote job creation. Spending for infrastructure builds the base for further economic growth.

We are at a historic low for federal government revenues — 14.4% of Gross Domestic Product — a revenue level we have not seen since 1950. We are a historic high for federal government expenditures — 25.3% of GDP — a level of spending not seen since the Second World War. If we do nothing with the tax code and spending programs, revenues will rise to 19.3% and expenditures will drop to 22.6%, a budget deficit of 3.3% of GDP. You can review the history of taxes and spending at here. The rise in overall health spending accounts for the greatest part of long term structural deficits. This includes the per capita growth in Medicare, Medicaid and the tax expenditure for private health insurance. Under the leadership of President Bill Clinton, the nation increased taxes, reduced spending rates and moved from large deficits to a healthy surplus. We emerged from a recession, had robust and broad economic growth, followed by a serious speculative bubble on Internet stocks and a recession.

Under the leadership of President George W. Bush, the nation cut taxes in a manner skewed towards upper income tax payers, increased military spending due to two wars and domestic spending due to coverage of prescription drugs for seniors. We emerged from another recession, had healthy economic growth followed by a large speculative real estate bubble and the most severe economic and banking crisis since the Great Depression. TARP was enacted to salvage the financial system. Under the leadership of President Barack Obama, the nation cut taxes equally for all Americans as part of ARRA, then extended the Bush tax credits temporarily and temporarily reduced payroll taxes for employees. Military spending continued unabated due to two wars. TARP was used to salvage the domestic auto industry as well the nation’s banks. ARRA was targeted to building physical and human infrastructure and helping state and local governments weather their loss of revenues due to the recession. ACA passed; it will offer affordable coverage for all American citizens and pay for the expansion with equal measures of spending cuts and increased tax revenues.

Our nation is now at the precipice of default on the national debt at a time of still high unemployment and slow economic growth that are the residue of our latest recession. The prospect of default is due to the need to raise the nation’s debt limit, but it also coincides with our need to achieve long-term deficit reduction. This presents an important opportunity to set the nation’s future on a sound track. We could also precipitate a severe national and global recession if we fail to act wisely.

Acting wisely means we must neither increase taxes nor cut spending precipitously at a time of slow recovery when the potential for a double dip recession is real. Acting wisely means we must trigger phased-in spending cuts and tax increases to take effect when the economy is in strong recovery. Acting wisely means cutting spending and closing tax loopholes that are not achieving their objectives. Acting wisely means we must bend the cost curve; health spending must be slowed through serious payment reforms in Medicare, Medicaid and private insurance that pay for improved health outcomes, not by denying care and coverage to our nation’s citizens. Acting wisely means we must develop a sounder, fairer tax system, rather than one riddled with confounding loopholes and inequities to the immediate advantage of some but the disadvantage of all. Acting wisely means that when we must choose to fight wars, we must eventually pay for them with increased revenues. When we expand health benefits, we must adopt offsetting cuts and revenue increases. Acting wisely means acting now before precipitating an entirely foreseeable and preventable economic catastrophe.