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The Truth About the Deficit

Posted By Barry Ritholtz On October 17, 2013 @ 7:15 am In Mathematics,Politics,Really, really bad calls | Comments Disabled

Yesterday, I was on Pete Dominick’s Sirius XM Satellite radio show (audio below). A caller asked about how to close the deficit. His comments revealed that his concern about the deficit was merely a ruse, a tool to be used to achieve very different goals.

If you are truly concerned about deficit, then what you must do is (eventually) raise taxes and cut spending — that is how you balance the budget.

Current deficit is now ~$550B, down from over $1.1T (Clarification: FY 2013 deficit = $650b, 2014 deficit estimates = $568 billion). Ian Shepherdson, the chief economist of Pantheon Macroeconomics, wrote “We are baffled by the idea that the pace of deficit reduction needs to be increased, given how rapidly the picture is improving already.”

If the tax cuts from 2001, 2003 were repealed, half of that deficit goes away.

If the FICA cap is lifted from $113k and allowed to rise to $250k or $500k, SS is solvent for 75 years.

If the US no longer spent the equivalent of the next 20 countries COMBINED on Defense, a huge chunk of the deficit goes away.

The US now spends 2X what most developed nations spend on healthcare. If you are concerned about the long term debt, than you must develop a system that radically lowers US health care costs, bringing them into line with what other industrialized nations spend.

You cannot tax cut your way to fiscal solvency in a weak economy any more than you can spend your way there in a slow recovery. However, you can make the deficit worse with poorly timed tax increases or poorly timed spending cuts.

My read of the current situation is that it has nothing to do with the deficit. The past votes of the current Deficit Peacocks reveal that it is not important to them. Unfunded tax cuts (2001, ’03), expensive wars of choice (most recently, Iraq), and unfunded entitlements (Medicare Part D) reveal that most of the people currently clamoring about the deficit have precisely zero interest in reducing it. They are merely using the deficit as a tool to pursue their ideology.

The current debate has revealed two things: Some people very much want a MUCH smaller government, including much lower taxes. But, they know that is very unpopular among the broad public when you start specifying what to actually cut. It is an ideological goal with which most of the country disagrees. So, the argument that appears more reasonable is to come out against deficits.

Have a look at Center of American Politics – Statistics and Numbers on American Politics [1] from Esquire. While there are some areas of overlap, its pretty clear that the Tea Party is so out of step with most of the USA.

Want to fix the deficit? Then make the hard choices to cut spending and raise taxes (even if you implement this in later years).

Want to have a much smaller US government? The way to do that is not with the deficit or the debt ceiling or other misdirected tactics — instead, try having an honest debate on the subject, and see if you can convince a majority of your fellow Americans to that view . . .

 

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Stand Up with Pete Dominick XM Satellite October 16, 2013

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URLs in this post:

[1] Statistics and Numbers on American Politics: http://www.esquire.com/blogs/politics/new-american-center-1113

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