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Whether the public approves of such spending or not is irrelevant. It is unsustainable. Yet there is a disconnection in the public’s thinking. While more than four-in-five Americans disapprove of the job Congress is doing, a substantial number of Americans have been more than willing to cede ever-increasing levels of power to Congress that massive amounts of federal spending automatically confer. Federal spending which now consumes 41 percent of America’s GDP, compared with 28 percent in 1963. If the OWS movement is really concerned about an unseemly concentration of wealth and power in the hands of the few, camping out in Washington, D.C. makes far more sense than hanging around Wall Street.
Yet there is something far more ominous that remains an ever-present backdrop to this drama. The failure of the Super Committee was largely irrelevant in fiscal terms. Even with the automatic budget cuts engendered by that failure, federal spending will still increase by almost $2 trillion over the next ten years. And despite the claim by some analysts that the Republican-controlled House’s spending cuts of $38 billion from fiscal 2011’s budget have slowed the economy, the reality is that government spending has increased almost 5 percent so far this year.
Furthermore, the $1.2 trillion in “savings” over ten years must be measured against the $1.3 trillion in deficits spending we’ve accumulated this year alone. All a “successful” deal would have accomplished would be to slow down the rate of projected spending increases marginally more than the failure to reach a deal would have. It’s the equivalent of claiming one is curing oneself of alcoholism by drinking five martinis a day instead of six.
And even marginal savings might prove irrelevant. Despite the fact that a Moody’s economist said his firm is not likely to downgrade America’s debt due to the failure to reach a deal, nothing prevents a downgrade from occurring in the future. A downgrade which could raise America’s interest payments, making even the illusion of savings irrelevant.
That is not to say there is no downside at all in the Super Committee’s failure to resolve their differences. Congress has yet to act on a number of other fiscal matters that must be addressed before the current continuing resolution keeping the government going expires on December 16th. Those items include an unemployment benefit extensions, a Medicare doctor payment fix, a patch to the Alternative Minimum Tax and an extension to the expiring payroll tax holiday. All of them could have a significant impact on the economy if Congress fails to act. Yet the rancor produced by the failure of the Super Committee only exacerbates an already tenuous negotiating process.
In reality, only one group of Americans possess the most effective means for altering the nation’s current and unsustainable trajectory: the voting public. Whether they are up to the task remains to be seen. Despite all the rhetoric, the prime drivers of spending, social welfare programs, remain cherished items, even if the means of paying for them remain largely unrealistic, absent Euro-welfare state levels of taxation. Levels of taxation which have left that continent on the brink of its own date with fiscally disastrous destiny.
And lest anyone think “taxes on the rich” will solve the problem, it won’t. First, even at a rate of 100 percent on everyone making over $200,000 (America’s “rich” according to the president), there still wouldn’t be enough revenue collected to cover what we’re spending. Only a substantial tax hike on the middle class, where the “real money” is would do that. Furthermore, suffocating taxes would crush the one economic necessity that would mitigate much of the ideological intransigence of both parties: several years of sustained growth that would invariably bring in higher levels of revenue.
Second, the fundamental fallacy of taxation constantly promoted by the left is the idea that raising taxes by X produces X amount of additional revenue. This is based on their erroneous belief in static tax analysis, the idea that people will behave exactly the same way regardless of their tax burden. They won’t. The higher the tax burden, the more people engage in tax avoidance behavior. To what extent? Job Czar and GE CEO Jeffrey Immelt’s company provides a cautionary tale for the ages. General Electric submitted a 57,000-page federal tax return for 2010–one that produced a tax liability of zero, despite $14 billion in profits.
Whether Republicans are up to the task of educating the public on the primary driver of debt, aka runaway, reckless spending, between now and 2012 remains to be seen. Certainly “tax the rich” makes for a better sound bite than something like “beware of static tax analysis.” But the reduced spending argument must be won if the nation is to avoid bankruptcy. The failure of the Super Committee is nothing more than the latest deflection away from that argument.
Yet that deflection is only temporary. Either we get our own fiscal house in order or we will learn, much like Europe is learning, that the market will do it for us. Italy and Greece are not the only countries whose borrowing costs can spiral beyond the point where debt relief becomes impossible. Unfortunately, it looks like the 2012 election is probably the only realistic opportunity to accomplish anything meaningful. A lot can happen in a year. It’s a genuine shame that the best the nation can hope for is to tread water between now and then. If there’s anything we’ve learned from the failure of the Super Committee, it’s precisely that.
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