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A Few Reminders About the President’s ‘Balanced Approach’



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Last night, the president announced that he would be holding firm in his demand for $1.6 trillion more in tax revenue as part of any deal he would make to address the fiscal cliff. According to the Wall Street Journal:

President Barack Obama will begin budget negotiations with congressional leaders Friday by calling for $1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.

Mr. Obama, in a meeting Tuesday with union leaders and other liberal activists, also pledged to hang tough in seeking tax increases on wealthy Americans. In one sign of conciliation, he made no specific commitment to leave unscathed domestic programs such as Medicare, leaving the door open to spending cuts many fellow Democrats oppose.

There are a few problems with the president’s approach. First, it is true that he has been reelected to the White House, but I think he would be wrong to assume that last week’s elections was a referendum on his budget ideas and his balanced approach. Let’s not forget that Speaker Boehner won too. As we know, the House Republicans have positions on taxes and entitlement reform that are very different from the ones the president is trying to push.

Moreover, the president seems to have in mind something very similar, if not identical, to what he proposed in his FY 2013 budget. Yet this particular budget was unanimously rejected by the Senate — the chamber that’s in the hands of the Democrats — so basically his FY 2013 budget was rejected by his own party. That doesn’t seem like the right place to start. 

#more#Second, it is important to keep in mind what the president meant back in February by a “balanced approach” to deficit reduction. As part of his FY 2013 budget, the president offered $2.50 in spending cuts for every dollar in increased revenue. This was a very misleading deal then, and it’ll be the same this time around. A look at the budget summary tables (Table S-3 in particular) showed that there were far fewer spending cuts in the budget than was actually advertised. For instance, the president counted as savings in FY 2013 budget “cuts” that were the result of budget caps imposed through the debt-ceiling deal of August 2011. The biggest spending cuts would be phantom savings from the withdrawal of the troops from the Middle East and reductions in interest payments were counted as spending cuts. When properly discounting these gimmicks, the deal looked more like $1.20 in tax increase for $1 in spending cuts.

But let’s assume that, this time around, the president will actually propose a $2.50 spending cuts for $1 tax revenue deal. Even in that case, taxpayers ought to be worried. Past experience demonstrates that, inevitably, the balanced approach leads to more taxes and more spending, and the cuts don’t happen. Republicans have gone down that path before under President Reagan and the elder Bush. 

Now, I know that the balanced approach sounds good and reasonable. However, it is not “reasonable” or “balanced” if the actual deal doesn’t deliver on the spending cuts. Moreover, large increases in revenue don’t generally materialize through large tax increases either.

On a more fundamental level, exit polls reveal yet again that people want smaller government and less debt today and for future generations. This is consistent with what other polls had found prior to the election. That’s not going to happen by increasing taxes and giving Washington more money to spend on special interests, whether that’s green energy or defense contractors. Congress need to start cutting spending, and as a starting point, it needs to allow sequestration — all of it. Government spending does not drive economic growth, so we shouldn’t worry about cutting. The policies of the last four years, unprecedented government spending and the slowest recovery, ever are the best example of that.

I do think, however, that there is hope. We know a few countries that have successfully reduced their debt-to-GDP ratio in the past. Here is how they have done it. As you can see, the Alesina study — which was confirmed by many others – shows that fiscal adjustments that rely on spending cuts are the best way to reduce debt-to-GDP. These spending-cut-driven fiscal adjustments are less likely to cause recessions than those that rely on tax increases, Alesina finds.

So let’s give spending cuts a chance. 



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