Tuesday, October 19, 2010

Obama girds for 1993...

Responding to my close reading of Obama's outline of the nation's fiscal challenges in the Peter Baker interview, a reader protests that based on my quote selection, "it seems as if obama will cut nothing. which means a MASSIVE tax increase on everyone. which will kill him politically, deservedly."

Well, if "massive" means the fiscal equivalent of rolling tax rates back to those of the Clinton era, which would take care of most of our budget woes, the reader is probably right. Here's how I read Obama's read:


The single most important "cut" is to get control of medical inflation. Obama devoted the first two years of his presidency to doing that and went to the mat for significant cost controls in the PPA (cf. Larry Summers). Next up on that front: a strong public option.  Government control of healthcare prices is the only way to keep a lid on them. Every other wealthy country gives the government that power. You'll never get that from the Republicans.

Next is defense spending. Gates is doing all that is humanly possible in the US today to keep a lid on growth,  more than anyone else could do. Obama has gotten creative trying to wind down our wars. We don't know whether he'll succeed, but but there will be no serious force reduction -- personnel counts for the bulk of military spending -- until our commitments in Afghanistan and Iraq are greatly reduced. Long-term, the U.S. needs to gradually divest its hegemon role.

Social security is a relative bite on the ass. It's not in terrible shape. A sane result from the deficit commission would be to tweak it a bit, raising the FICA cap, maybe trimming the COLA formula (though big reductions there would drastically reduce its ability to provide a comfortable retirement to most Americans). Kevin Drum outlines the options nicely:


Social Security is a pretty easy problem to address, and the reason it's easy is that you don't have to limit yourself to a single big solution. In fact, Social Security reform practically cries out for a basket of small, almost imperceptible changes. You could, for example, partially uncap the payroll tax or change the tax rate slightly (or a combination of the two); gradually increase the retirement age to 68; and adjust the inflation calculation for annual benefits slightly. This would fix Social Security's problems entirely and would be barely noticeable for most peopleThere are lots of other possibilities, and the more of them you put together the less painful they are. Chapter 4 of this report can help you put together your own plan.


Infrastructure: as Ezra Klein recounts, a bipartisan group of former transportation commissioners has estimated that we need to spend $200 billion a year. Not doing it, as Larry Summers says, places just as great a burden on future generations as do deficits.

So taxes must rise. We are in this mess because of Bush's tax cuts, and Bush's wars, and the Bush-era Republicans deficit-financed prescription drug benefit.  Reverting to Clinton era rates would take care of most of the structural deficit. We were not overtaxed in the Clinton era.   Better yet would be tax reform, but it would have to raise revenue. We could reduce tax expenditures, e.g., the mortgage credit (good luck...), but that's a tax hike too.  The smartest solution - tax energy heavily - is the hardest politically.

The U.S. is undertaxed and overextended militarily. Our military commitments probably explain the difference between our safety net and that of other wealthy countries.

1 comment:

  1. I'm passing this along; thanks Andrew. With so much "out there" it's good to get a bite-sized summary like yours. It usually resonates.

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