defense spending

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Round Two

The problem with caving in to a blackmailer is that they are inevitably emboldened to try again. Usually the second extortion effort raises the stakes for both sides. This is where we are with the budget. Obama caved in last week in order to keep the government functioning. In the process he acquiesced to a long litany of right wing demands. The cuts agreed to include all sorts of completely irrelevant attacks on various aspects of long standing social programs. The Republicans littered the proposal with cuts that are minor in dollar terms, but hugely significant to their culturally extreme voter base. So the lunatics won round one. They are now back for more.

The start to round two was signaled yesterday when the Republican leadership announced that it will allow the US to hit its debt ceiling. This is expected to happen sometime in mid-May. After that deficit spending will have to be met either by cutting spending, as the Republicans expect and hope, or simply by printing the money needed – i.e. not through borrowing, an approach I have yet to see endorsed by anyone in our elite on either side of the ideological divide.

This will get ugly. Really ugly.

Let’s all acknowledge the serious nature of what is about to go on. The right has set the game up for themselves: this debate is one they precipitated by deliberately defunding the federal budget by cutting taxes back in 2001 and 2003.They undermined our fiscal stability by enacting tax cuts that deprived Washington of money. At the same time they enacted big increases in government spending. They were the very epitome of recklessness. Yet the voters still perceive them as conservative. The left has failed miserably by not being able to persuade voters of the enormous risks associated with those tax cuts. If – a big if – we are on the road to ruin it is because of Republican fiscal strategies, not purely because of unaffordable programs.

Consequently, we are now discussing what America will look like for the next fifty years. Will there be one America with a solid middle class and relatively less inequality? Or will there be two Americas with the current sharp divide widened further? A top one percent, and then the rest? Please keep this in mind as we debate what to do.

The greatest feature of our economy over the last thirty years has been the systematic attack on democracy by the wealthy. They have used every trick to undermine equality. They have accumulated unprecedented power and wealth by emphasizing notions of freedom and individualism that resonate well with voters, but play to the hand of only the strong. That is to say the wealthy themselves.

The long term failure of the American economy to maintain its post-war growth path opened the door to the revival of these and other anti-social ideas. They took strongest root in the aftermath of the 1970’s stagflation when the wealthy were abetted by zealous and ideologically motivated economists who wanted to overthrow Keynesianism. They subsequently infected business with shareholder value strategies that shortened investment horizons and undermined competitiveness. They fueled the great cost cutting and offshoring movement of the past three decades. They encouraged the steady decline of all forms of collective action to protect the weaker elements of society. They encouraged absurd risk taking in finance. They undermined social programs aimed at lifting the poor. They reduced taxes for themselves. They resisted shareholder control of management. They set up interlocking boards of directors so that like minded people sat in judgement of CEO’s. They neutered all criticism. And they homogenized the world view of our media and elite so that there is no alternative taught in “respectable” or “serious” schools nor reported in the mainstream press.

In short they took power and then censored and gutted or suborned the opposition.

Most of this long list has happened in the past thirty years. Cumulatively the effect has been astonishing. America is now the most divided nation in the industrial world. More so than it has been for a very long time. And it is arguably the least stable because its democracy has been subverted.

In short America was taken over, silently and effectively, by a very small group who now runs the place for itsown benefit.

But even the very rich cannot pull off a coup of this sweeping nature without accomplices. This was the cause of the uneasy alliance the wealthystruck with the populist wing of the Republican party. A wing that grew in power in the aftermath of the contests over desegregation and women’s rights. It is easy to forget just how much hatred was stirred to the surface by the prolonged debate over the Civil Rights Act. It’s echo is in today’s right wing disgust at Obama’s very presence in the White House and the pervasive doubt, within the extremist camp, of his place of birth. The alliance is structured this way: the rich want to rent seek and amass wealth. The populist/libertarians want to roll the clock back to a past era where government didn’t interfere. And by interfere the more extremist Republicans mean the government should no be able to limit their ability to discriminate.

Yes, this fight is that basic.

Yes, it is that venal.

Yes, America is that divided.

And, no, some people have never forgiven government for ending discrimination. For them it was an intrusion into their liberty.

It was, I think, Amartya Sen who said that there are no famines in democracies. The great fight over establishing the safety nets in the industrialized nations was a reflection of this effect of democracy. Voters look after themselves. Sooner or later they will force politicians to make sure that most people are safe from economic disaster. This is why democracy is in opposition to capitalism. The one spreads the wealth. The other concentrates it.

That we, in America, have so weak a safety net, and that we have so many people without health care coverage is testimony, by extension of Sen’s observation, to the weakness of our democracy. Money talks in our politics. The agenda is set by the wealthy. The majority have to accept what little they can get.

It is this pernicious context that now puts a boundary around what is, and what is not acceptable in the debate over the deficit. Our elite assumes the deficit is an existential problem for the nation because it is an existential problem for them. So they have forced us into this discussion. And the libertarians are along for the ride. It is the rentier class who would lose from inflation – which erodes the value of debts – so the Fed watches inflation like a hawk and ignores, relatively, unemployment. This is also why financiers warn about credit markets and debt levels: their assets are at stake, so they force us to act against our own interests in favor of theirs.

In his speech today, Obama presented his view of how to deal with the deficit. He told us that no sensible solution can avoid raising revenues. That means increasing taxes and broadening the tax base by eliminating the plethora of avoidance schemes and loopholes that reduce it. So he proposes allowing the Bush tax increases to go into effect for the top tier of income earners. Also, it is important that any cutting extends to include offense spending. The Pentagon’s long term burden on our budget is unsustainable. It needs reduction. Obama agrees.

The big nut, however remains health care, which means Medicare. The Republicans have done us all a favor by admitting publicly that they want to eliminate Medicare. That was the thrust of the ridiculous plan presented by Paul Ryan last week, and which was vividly attacked by Obama today. The voucher scheme proposed by Ryan is designed to move the burden of health care costs onto the elderly. This effect results from the way in which the voucher’s value would rise independently of, and slower than, health care costs. So a gap would open up that would have to be filled by the elderly themselves. Or, of course, they could forgo treatment. This attack on Medicare opens space for the Democrats to respond to the voter’s fondness for the program. Poll after poll suggests that voters do not want Medicare abolished. Indeed, and ironically, the most vehement opposition to cutting costs in Medicare comes from self-confessed Republican supporters.

One point to keep in mind is that the Republican voucher scheme does nothing to control health care costs themselves. It simply shifts the burden out of the government budget into private budgets. Obama, in contrast has attempted to roll back the steady rise in costs by pushing through his reform law last year and, today, by calling for the beefing up of oversight of Medicare spending and using its market power to force lower prescription costs.

Neither the Ryan plan nor the Obama plan will be passed into law of course They are merely the opening salvo in what promises to be a very hot and protracted war.

Which brings me back to my theme: this is a test of our democracy. If the wealthy win the debate, as they certainly did during the talks over finance reform, we should expect to continue towards a more divided nation. The stakes are high for the wealthy. They will spend a great deal to buy the necessary votes to force the burden of austerity onto the poor, elderly, and sick. Obama’s willingness, and ability, to lead the resistance is crucial. His speech today was encouraging. But his track record is worrisome. He talks a good game, but then negotiates badly. This time he needs to stare down the extremists. He cannot, he must not, he should not, give in to their extortion efforts again. If they want to use the debt ceiling as hostage, then let them. Let’s have the fight that they keep asking for. Make it clear who wants what. Then dig in.

Round two is all about the future of the middle class. It is beleaguered and in retreat. It is suspicious and confused. It is angry. It does not need pretty talk. Nor does it need to be betrayed by weakness in the face of the attack from the wealthy. It needs a strength Obama has so far failed to demonstrate. And it needs an articulation of why this fight is so important. In short, it needs leadership.

Perhaps even more than this: if we lose round two, the cause of democracy will be set back even further.

Inequality must end. The major portion of austerity should fall on those who led us down the fiscal path we have travelled. The responsibility is theirs. They should pay the cost for fixing the mess their policies caused.

Obama has set a partisan tone with his speech. He has set up the fight. Can he carry through?

I wonder.

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The Budget and Other Fiction

Rule one of US budget watching: the President’s budget is never, never, worth the paper it is printed on. It is more of a suggestion. It is a helpful guideline to lay down the boundaries within which the President tries to negotiate with Congress. If that Congress is intransigent, as it is an a big way right now, then even that limited goal becomes futile.

So, with that grim preamble, what do we make of the Obama budget released this morning?

Well it’s full of austerity moves. It has a few fairly lightweight and unnecessary so-called investments. And it will be forgotten as soon as the Republicans resume their attempt to use the debt limit as a bargaining chip with which to attack social programs.

And therein, as the bard once said, lies the tale.

From my perspective the Obama budget is lamentable simply because he has decided, once again, to play on the Republican party’s home turf. Rather than make the case for prolonging support for the economy, he has acquiesced to the idea that the economy is now sufficiently buoyant that we can start to set the government in reverse. We can, he argues, begin the retreat from the emergency measures and allow the market to dictate the next few years.

I have no idea what statistics he is using in this calculation, for I don’t see one strong enough to justify the shift.

Moreover, given that this budget document is useless, my suspicion is that the administration will now get down and dirty with the Republicans as they argue over precisely which domestic spending programs should be cut. Inevitably this implies hammering away at the sick, the young, or the poor. Call me cynical, but I doubt the Tea Party extremists who now boss the Republicans will settle for big cuts in offense spending, security, or anything else affecting guns.

And we already know that they are looking for a show down over that debt ceiling. For those who missed what this means: the US Treasury issues and maintains the US national debt within an upper bound set by Congressional vote. Normally raising this limit is not controversial. As the economy grows it is no surprise that the amount of debt also grows, so the debt ceiling has crept up over time. Add in the enormous jolt given to the debt by the recent crisis, and we have nearly reached that limit. This, of course, offers the Republicans a great opportunity to express their new found fiscal conservatism. New found because at no time during the Bush era when we were plunged into red ink by those infamous tax cuts, did anyone of any prominence on the right whisper a word about the debt ceiling.

That was then this is now. Right wing leopards do chan ge their spots.

Debt panic is a good vote catcher, and the Tea Party has rolled into town along with its ragtag mix of libertarians and general trouble makers. They smell blood. They hope to force the US government to shut down. That this would be a disaster for the economy – imagine the spike in interest rates – is apparently of no consequence. After all as their tactical mentor, Lenin, argued more than once: sometimes you have to burn the village to save the village.

Yes we are at that point.

And, no, I am not making this up.

We have now entered the first of what promises to be many confrontations that will extend all the way to the next presidential election. We are playing with fire. We might well muck up the recovery.

It is in this context that I evaluate Obama. He fails any test I can come up with.

His decision to move the game onto enemy territory and away from a defense of the weak is a shameful signal of his inability to conceive of an alternative economic strategy. His emphasis on investment in such things as alternative energy and so on is laudable. Or rather it would be were it not so business oriented. Yes he wants to cut out some goodies now flowing into the oil and gas industries – who patently don’t need our help – but the outcome from his approach is a long way off. He does little to produce help immediately for anyone who might have been called within his constituency.

Having muffed bank reform he is, essentially, punting on making headway on the real causes of our structural deficits: those Bush tax cuts, our over extended military, and health care.

So today’s kick off is not benign, it is malign. It gives away much of the game before the bargaining has begun.

Add in the almost complete lack of public support for substantial cuts in domestic spending and we are forced to conclude that all this huffing and puffing over the impending debt disaster only exists within the minds of our elite. It is their wealth under attack. They are, after all, the primary creditors of the nation. They are also the very group who rode the economy over the cliff. That they are now clamoring for cuts to the programs that don’t affect them is shameful, and would be inflammatory were the public more informed about where the budget money really goes. But, alas, the public is terribly ill-informed. A majority think that foreign aid is a major program. It isn’t. In fact the US is a derisory aid giver. A near majority don’t even know that Medicare is a government program. In survey after survey the voters respond that they would tolerate higher taxes in exchange for the protection of the major social programs, especially Social Security. In no survey I am aware of has there been a hint of support fro austerity.

So austerity is being forced on us all by the “experts”. Those in the know. Those who thought bank deregulation and a vast derivatives business would grease the wheels of commerce.

Yes those experts.

Worse: there is little or no evidence that the credit markets are running for the hills. Inflation fears are supposed to be a harbinger of credit market dangers.Much is being made of the rising spreads between inflation proofed and non-inflation proofed bond rates. That spread gives us a clear indication of inflationary expectations. And, yes, they’ve gone up over their low points of last year. In fact they have shot all the way back … to normal levels. For the US that spread was 2.4% a year ago, and is now 2.3%. Where in that trend is a panic over debt? Nowhere. But that doesn’t stop the hawks from banging the austerity drum.

So, instead of initiating a debate about our budget priorities, and instead of preparing us to have an adult discussion about why we continue to spend seven times anyone else on military stuff – is our military so bad that twice as much couldn’t do? -Obama has hurled us into a debate about which particular disadvantaged group should bear the brunt of the cuts.

Take your pick: children? The sick? The poor?

One of those has to carry the can for the banks.

Which one would you go after?

The Republicans say all three.

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The Budget [non] Debate

Well the so-called debate about the federal budget deficit has not started well. Apparently we cannot even agree on the place at which to begin, let alone the place to which we need to travel. This is not good. Sometimes I feel so downcast at the juvenile nature of our discourse. Other times I simply am in awe of the degradation to our nation regular people are willing to allow in support of their own political viewpoint.

Moreover I am tired of being accused of writing ‘rants’ about the budget when all I am trying to do is establish the extent of the problem. At least I am not alone: James Kwak at the Baseline Scenario gets a whole lot more heated, and partisan, than I do. PLease read his commentary – via Brad DeLong.

My own frustration centers on those folks who are now predicting the end of America as we know it due to the ‘sea of red ink’ that lies ahead. There should be some sort of rule enforcing consistency: where were these same people calling for the ‘end of America’ back in 2004 when the deficits, in their current form, opened up? Anyone who stayed quiet then, but who now screams that the roof is caving in, should be banned from the discussion as being disingenuous. And why are more normal people now running scared and more easily upset? Where was their attention back then?

You can’t have it both ways. If you backed the tax cuts of 2001 and 2003 then you have no concerns about deficits. Unless you came out of the closet and argued for massive cuts in programs like Medicare and Social Security at the same time. Then at least you have integrity.

As Dick Cheney said at the time: ‘deficits don’t matter’. That was the mantra of the administration in 2004. What has happened since to make that philosophy go away?

Those of us who are fiscal conservatives have always argued that deficits do matter. I remember being shouted at by ardent Reagan supporters back in the 1980’s when I would make speeches criticizing the deficits he created.

It really ticks me off that a deficit created by Reagan or Bush is apparently benign, but that one in an Obama budget is a disaster.

Even more annoying is the fact that the media and intelligent folks around the country suddenly jump on the bandwagon and create an upswell of emotion sufficient to press Congress to cut spending at exactly the wrong moment. This is a re-run of the 1930’s. Doesn’t anyone read history?

And, no, I am not being shrill when I point out in simple declarative language that our problems began in 2003/2004, not last year – I am being factual. I am sorry if the facts get in the way of your political view, or vice versa. There is nothing I can do to re-write the 2001 through 2008 fiscal policies to make them better. We are stuck with them.

It is galling beyond belief to have spent several years trying to point out the error of those policies and then suddenly to see people who criticized me for talking about deficits get religion at the very moment when a deficit actually makes sense.

Let me be categorical:

I am one of those dull folks who thinks that the federal budget should be in, or close to, balance in normal years. A normal year being one where GDP is growing at its historical trend rate. Whenever GDP falters the budget should swing somewhat, but not excessively, to provide ballast. Under normal circumstances the first line of defense for economic policy should be monetary policy – raising or lowering interest rates. Only in unusual or extreme circumstances should fiscal policy be the main source of defense against a downturn.

The ‘ballast’ role of fiscal policy is automatic. Federal revenues will shrink as the economy drops into recession – tax receipts will be diminished. But outlays actually rise – unemployment insurance and other safety net programs kick into higher gear. This means that the deficit automatically widens as we enter recession. It also means that the deficit goes away, just as automatically, as the economy recovers.

Therefore, under normal circumstances, we don’t need to make radical shifts in policy to deal with a recession: simply raising or lowering interest rates will do.

But.

The 2001 through 2008 period was anything but normal.

We ran very high budget deficits and had very low interest rates. This was a deadly combination. I argued against it at the time. My argument being that we were using all our ammunition up in peacetime – we would have very few options if the wheels fell off the economy. Which is what happened in 2007/2008. [sorry about the mixed metaphors!]

We were left with very little room to lower interest rates, which meant monetary policy was ineffective – just as predicted. It also meant we had to deploy deficit spending at a time when we were already sinking in red ink.

In short, economic policy for the last decade has been reckless. Especially so in the light of the result: the worst downturn outside the Great Depression.

Things could not have been managed to worse effect.

Not only this, but the legacy deficit is huge and growing. The temporary deficit – that bit caused by the crisis itself – is enormous as well. Add the two together and we have the mother of all fiscal problems.

Which is why we need to be both clear and honest about what we are facing. Politically motivated finger pointing won’t help. Nor will any amount of diversionary smear tactics. The base of our problems reside in the huge cut in revenues caused by those 2001 and 2003 tax cuts. They were not accompanied by similar or offsetting cuts in spending. On the contrary, spending increased. Presumably the Republican run Congress back in 2004 did not perceive massive deficits to be a problem. They believed Cheney: ‘deficits don’t matter’. Now, apparently, they disagree with him. Now deficits do matter. In fact they are so dire that we need to slash and burn everything in sight. Except defense spending.

In the divisive atmosphere of the ‘politics of no’, it is very hard to maintain a discussion that could lead to sensible outcomes. It is hard to get agreement about the nature of the problem, let alone about solutions.

So let me -once again – set out the issue:

We have too little revenue over the long term to support our long term spending. Notice the long term nature of the problem. It is not a short term issue. The crisis spending is not what dug the hole. Those short term costs are simply added to a pre-existing and very deep problem we have avoided talking about for years.

We take in too little.

We spend too much.

In particular our spending on defense and health care are both hurtling out of control. Both need containing. Both need to be slowed down sharply. That means cutting out defense programs and rationalizing the military. And it means getting hold of Medicare and reducing its cost. Health care reform was central to reducing the budget deficit. All neutral scorekeepers agreed that the reform was a significant first step towards budget control.

The moment health care reform became politicized we lost control of our budget. Anyone who opposed that reform needs to come clean on what they would do to cut health care costs.

One suggestion is on offer from the GOP at the moment: cut Medicare for those under 55. Meaning that anyone under 55 would have to pay taxes to support those currently collecting good benefits, with the expectation that they themselves would never get those same benefits. That’s a massive shift in wealth from the young to the old. It is a blatant attempt to pander to old voters. It is politicizing the discussion and making it impossible to get agreement. Deliberately. Why on earth would younger voters go for such a rotten deal? Why is it that older voters have to be pandered too in the first place? Pitting one generation against another is hardly a good example of thoughtful problem solving.

But so low has debate in America sunk that asking for sensible suggestions, and laying out the facts from the historical record, is attacked as being shrill or partisan.

These are dangerous times for America. Its political discourse is now so embittered and divided that reasonable people are better off withdrawing. Its political system is so riddled with disfunctionality that sensible people cannot make decisions. It is Alice in Wonderland like, where minorities become majorities and larger is smaller. Where those who cause problems yell at others for having caused those same problems. Where facts are imagined and the imagined becomes factual. Where voters are so angry they act against their own interests. Where voters scream about the inaction of politicians, and where politicians won’t act for fear of the extreme reaction of voters.

These are the symptoms of a declining nation.

And they are why we will not solve our very real economic problems any time soon.

We have a big problem to fix. It has festered for years. We need to confront it, and deal with it sensibly. We are not off to a good start.

But that’s what we’ve become isn’t it?

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The Freeze Part 2

No I haven’t changed the basic thrust of my opinion: the freeze still is rubbish. It covers a small part of the budget and so will garner very little by way of actual deficit reduction. At the same time it represents an abject capitulation by the White House to Republican arguments. At best it panders to populist emotions about government profligacy in the face of private penury.

And we all know how wrong that is.

Ezra Klein absolutely nails the capitulation issue. Obama has tossed overboard one of his better arguments: health care reform was our best and brightest shot at cutting the deficit. The problem became that the GOP was successful in getting the public think of reform as a new, and costly, government program, which it isn’t. Obama conspicuously failed to get his message across: his view of reform was that of cost control rather than of entitlement extension.

Come to think of it I doubt he really tried.

In the longer term, after the effects of the crisis have abated, the basic deficit questions can be resolved down to these:

  1. Revenues have been slashed by the Bush tax cuts of 2001 and 2003 without resulting in an offsetting boost to GDP growth. Greg Mankiw tried to explain them as Keynsian deficit spending, but he absolutely failed to make the case. Instead the loss in revenue has plunged us into red ink on a permanent basis : this is the structural problem we need to fix.
  2. Entitlements are too expensive. The really big issue is health care. We cannot keep Medicare funded the way it is now. It will bankrupt us. It needs modification. Bush added vast costs and blocked the implementation of efficiencies. The current health care reform fixes those errors and more.
  3. In contrast Social Security is relatively easy to fix: raise the retirement age to reflect modern demographic realities; and eliminate the ceiling on social security taxation. Along with minor tweaks these solve any cash problems the program has.
  4. Defense spending is way too high. We are conducting wars hither and yon, without any limit in time or extent. Frankly we cannot afford to anymore. We need to modernize and reduce the military: one attractive plan is to eliminate the air force as a separate entity and spread its functions into the army and navy. The savings would be enormous.
  5. Our debt levels expose us to much higher interest costs if rates jump at some future date. Right now we are lucky rates are historically low. That luck could run out at any time.

Fixing all these problems would not be easy at the best of times. In the context of a fractured and recalcitrant Senate hell bent on obstruction it seems impossible without strong White House advocacy and leadership. Which we do not have.

By capitulating to the 41 GOP senators who, for some reason, put the fear of god into him, Obama has adopted their agenda in a craven attempt at electoral survival. He has put survival ahead of principal. He now stands for nothing other than winning elections, and so prolongs rather than changes the course of the Reagan/Bush trajectory – which would be great if that trajectory led somewhere other than deeper into debt.

The implication is that, instead of making fundamental shifts in spending on entitlements and defense, we will focus simply on tax and spending cuts only. Defense will be ruled off limits. Intelligent cost reduction of health care will give way to the reduction of benefits and the reduction of entitlements rather than the enforcement of cost control.

The change we can believe in is long forgotten.

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Budget Clarity

The chatter about the budget gets more noisy. I understand the reasons why this has emerged as such a big issue: the economic landscape will, in large part, be shaped by the Federal Budget over the next few years. And we are now entering the post-crisis, or rather post triage, phase of the recession, so naturally people start to talk about slight;y longer term problems. There is no doubt that one of those problems is the level and accumulation of national debt.

This is not a unique US-only problem. The entire industrialized world is now being weighted down by record or near record government deficits. Indeed the crisis is such that some countries, notably Ireland, Greece, Italy and Spain are under enormous pressure, and are at risk of being unable to continue to fund their obligations.

The US is nowhere near that level of indebtedness, but recent chatter has made it seem so.

Given the upcoming debates on health care and banking reform we should all keep a sensible approach to the issue. In that vein I want to highlight the central topics.

  1. Under the currently proposed budget and various bail-out programs in place here the US national debt has no prospect of declining during the next ten years. Even after the immediate crisis abates, sometime in the next two years, the Federal deficit will continue to add annually to the debt. At no time in the foreseeable future is there a surplus. The Congressional Budget Office, just today, forecast the debt as reaching beyond 80% by the end of this decade. This long term permanent annual, or ‘structural’, deficit is what the fiscal hawks and the bond markets are howling about. I have said before that I think the level of criticism they are making is simply so much shrill hypocrisy given their total support for the Reagan/Bush fiscal follies that created the deficits, but I agree: structural deficits are a problem that need to be dealt with.
  2. The root causes of the deficits are fairly easy to identify: after the triage efforts have subsided, and the temporary or ‘cyclical’ part of the deficit is reduced, there remains an imbalance. We spend too much. On too many things. We have an inherent conflict between the goodies we want and our willingness to pay for them. There is no magic in this. What is more difficult is getting a dialog going on what we should do. This requires an examination of our priorities which, given our post Reagan political polarization is practically impossible. But it is something we need to do.
  3. This means every budgetary line item should be open for critique.
  4. The big ‘deal breakers’ are health care and defense. Oddly retirement, while it represents a massive problem is more tractable to solution: raise the retirement age in line with our longer life expectancy and the issue shrinks remarkably. In contrast health care looks set to blow the budget wide open. Which is why we will be discussing the reform of our system ad nauseam over the summer. Even harder, apparently, is getting a sensible discussion over defense spending. The US spends as much on defense as the next ten countries added together. It has no credible near term conventional enemies even remotely capable of inflicting harm on the US mainland, so this level of spending seems out of kilter with the threats. Non-conventional enemies we have in abundance. Our foreign policy is not exactly benign, so gathering enemies has been easy. Post 9/11 defense has been an untouchable budgetary item. For how long this can go on is debatable. Eventually the cost of maintaining the military will impinge on our domestic choices. It will definitely accelerate our budgetary decline.

The US is lucky in that tax revenues are low compared with other countries. Even including State taxes the total is still less than 30% of GDP. Most European countries are at the 40% mark. They thus have far less scope for dealing with their deficit issues: they can only realistically cut spending, extra taxes appear unlikely. Here, however, there is scope for a more balance approach. We have room for some tax increases as well as getting costs under control. Our debate therefore should be an easier one.

There is extra revenue, i.e. more taxes, available here because we have more tax loopholes to close. The two most obvious ones are the welfare support for home ownership via mortgage interest tax deductibility, and the exemption that businesses get fro health care payments they provide as benefits to employees. Neither of these should survive an honest discussion of our budgetary priorities. They both are highly selective and serve to make the tax code inequitable. They also have pernicious economic effects by tilting investment incentives towards unproductive assets. They should be eliminated. The revenues from these two moves alone would go a long way towards establishing a fiscally conservative long term budget.

But that would still leave a gap to be closed. A gap that can only be dealt with if health care is dealt with. Health care reform is not so much about health care, it is about fiscal prudence. We spend too much. We are profligate in our health care spending. We run the risk of bankrupting the nation is we don’t break this habit. Demographics cannot be avoided. The greying of the population that has been ‘looming’ for so long is now upon us. It isn’t looming, it has arrived. That we have refused to do anything in preparation is baffling, and makes the solution both more urgent and more difficult to achieve. But we have no alternative.

Cutting costs will inevitably mean less of something. Less service is probable. But that less service does not automatically mean less healthiness: our current wastefulness has not provided good basic care, it has produced the world’s most extravagant use of exotic and marginally useful tests or drugs. We are not healthier than other countries. We get less than average results from gilded and over the top costs.

It has to stop.

Finally clarity around the budget requires us to keep the two types of deficit clearly apart in our minds. the cyclical anti-recessionary deficit has bought us something: we dodged a depression. So there was a good return on that money being spent. Yes we need to reduce our cyclical spending, but that will happen as the economy recovers. The structural deficits bought us nothing. The Bush tax cuts provided no long term stimulus to the economy because they were so biased towards high end earners whose marginal spending was never going to be sufficient to boost demand and thus allow the cuts to ‘pay for themselves’. Instead we are saddled with the ned to re-examine them and get rid of the more egregious. Fiscal conservatism means undoing most of the Reagan/Bush legacy. This may sound counter-intuitive, but it remains a fact.

So budget clarity:

  • don’t confuse cyclical with structural deficits
  • we have scope for revenue raising via tax code tightening
  • re-visit the Bush tax cuts
  • but cost cutting is inevitable
  • defense
  • health care, health care, health care.

No matter what Cheney says: deficits do matter. We are now approaching the time to debate how to deal with ours.

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