Friday, December 31, 2010

We Need to Pay Our Bills

We Need to Pay Our Bills. That is the crux of the matter, isn’t it? We need to reconcile our spending and tax revenues. We need to plan for the expenses of an aging America. Finally, we need to systematically pay down the debt that has been run up over the past thirty years.

What are our priorities?

• We can leave tax rates alone and massively cut spending. Even over a ten year horizon, this would effectively mean the end of Social Security, Medicare/Medicaid and robust defense spending. It would also structurally weaken our economy as the multiplier effect of such cuts would be profound.

• We can leave spending alone and massively raise taxes. This would produce a better economy than the first option, but we would still be operating well under capacity. Eventually, the lack of spending discipline would not bode well in the markets and our Arab and Chinese creditors would insist upon ever higher interest rates on our trillions of dollars of debt.

• We can prudently cut spending and reform entitlements “bending the curve” of costs relative to GDP. We can carefully raise/reform taxes to eventually bring in 21% - 25% of GDP, the amount determined by the scope of the aforementioned spending cuts and entitlement reforms. We can structurally align the budget so that spending and revenues are in synch. We’ll have deficits during recessions and surpluses during growth. You remember – like we had under Clinton.

The options above are our honest choices. We will not “grow our way out” of this massive deficit, as Reagan and Bush promised when cutting taxes. Hard choices will need to be made – the kind that we have mostly avoided the past thirty years.

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