Monday, July 12, 2010

Thinking about the U.S. deficit


Actually, as economists more devoted to reality than to apologetics for greed have been insisting loudly, we shouldn't be thinking about the U.S. deficit right now. The Administration should be moving heaven and earth to spend more, to bailout the states, to save and create jobs, and to push the Federal Reserve to do the same if they don't want us mired in recession for the foreseeable future.

But if you remain curious about ways to bring down the national debt sometime in the future when we are more prosperous, I recommend exploring the Deficit Calculator created by the Center for Economic and Policy Research. This outfit describes itself as aiming

to promote democratic debate on the most important economic and social issues that affect people's lives.

The calculator shows what percentage of annual Gross Domestic Product-GDP (a standard measure of economic activity) the debt would be in 2020 under various policy options. At present, projections are that the debt to GDP ratio will hit 85 percent in 2020. The U.S. debt to GDP ratio is currently about 53 percent. By comparison, Japan currently sits at 185 percent of GDP, Greece (considered a basket case) is at 113 percent, and Argentina and Poland check in the 40s.

For the European Union, the standard countries must aim for has long been set by the Mastricht Treaty at 60 percent -- and any number of economists will tell you that this has been inflexibly low, privileging Germany at the expense of other member states.

So here's what happened when I played with the deficit calculator. Your mileage may vary ...

1) How about applying a small tax on financial speculation? Hey, that gets us down to 75 percent of GDP right there! Here's what that would work according to CEPR:

This is a modest tax on financial transactions like trades of stocks, options, futures and credit default swaps. A modest tax on these trades (e.g. 0.25 percent on the sale or purchase of a share of stock) would be barely noticeable to long-term investors. However, this sort of tax would be very costly to people who buy and sell stock by the hour or even the minute.

2) Let the Bush tax cuts die at the end of 2010. If Congress does nothing, federal income taxes will revert to the levels that existed the 1990s -- not a bad decade for business or people. Add this to the previous action and we'd be down to 69 percent.

President Bush's tax cuts lowered tax rates across the board by 15 percent. These cuts expire at the end of 2010. President Obama has proposed leaving the cuts in place for low and middle income families, but allowing the cuts to expire for families with incomes of more than $250,000 a year. This proposal would leave the cuts in place for high-income families as well.

3) Bring back the inheritance tax. Rich people in the U.S. benefited all their lives from the stability their society provided. They wouldn't have got rich if they had to live in Somalia or Kazakhstan. After the first few million dollars are exempted, their heirs can afford to share some of the loot with the society that made their lives possible. That would get us down to 67 percent. Again, Congress could do this by doing nothing!

The estate and gift taxes were phased out under President Bush's tax cut. However, the taxes are to return to their original levels after 2010.

4) End our unnecessary, purposeless wars. A quick end to Iraq and Afghanistan would get us down to 62 percent.

This proposal would reduce combined troop strength in the region to 30,000 by 2013.

5) Missiles and missile defense are awfully expensive, especially since we outspend the whole rest of the world on weapons. Cuts would get us to 62 percent.

This proposal would reduce strategic nuclear force to 1000 deployed weapons on 160 land-based missiles and 7 ballistic missile submarines; limit planned upgrades to weapons industry infrastructure and research.

6) The really big potential savings are in health care and it doesn't have to complicated. Simply using the bargaining power of the Medicare to bring down drug costs (plus all the measures above) would get us down to 52 percent -- exactly where the debt to GDP ratio sits today!

This option would have Medicare negotiate lower prescription drug prices for drugs purchased under the Medicare prescription drug plan. Currently people in the United States, including those taking part in the Medicare drug plan, pay close to twice as much for the same drugs as in countries like Canada or Australia that negotiate prices with the drug companies.

If deficit reduction is the right policy goal, this exercise shows it is possible without destroying general well-being and/or gutting Social Security and Medicare.

There are two simple principles that should underlie any deficit reduction:
  • the rich have the money and the purpose of civilized government is ensure that they share;
  • the U.S. should get out of the business of world domination by military power projection.
Do those things, and we can stop worrying about excessive national debt.

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