US Deficit Reduction: Stating The Obvious?

Posted by on Jul 12, 2011

On occasions the behaviour of US politicians while they attempt to raise the debt ceiling and implement deficit reduction seems to verge on the theatrical. We’ve seen people storming out of meetings while press conferences are called and “off the record-but on the record” briefings take place. As a recent immigrant I find it incredibly fascinating to see how the checks and balances of the American political system plays out. This is a great country, but I can appreciate why so many on Main Street get so frustrated with Washington.

I have to say, I’m somewhat confused about the stance of some Republicans at the moment. I come from a country that has tackled deficit reduction. Following the view of most economists and budget analysts that a comprehensive mix of spending cuts and tax increases is essential to any viable deficit reduction plan, the UK has done both, with the emphasis on cuts – 25-40% across all but two government departments over 4 years.

Yet some Republicans will not countenance any form of tax hike. This is despite the fact that according to recent polls, 1 in 5 Americans do not think the debt can be tackled by cuts alone. That 66% of Americans believe that as part of a deficit reduction package taxes should be raised on those earning more than $250,000 a year.

Certain members of the GOP say that raising revenues will kill the economy. But history defies this claim – America’s most robust eras of recent growth came after the first President Bush and President Clinton’s reasonable tax increases. Reagan raised taxes 11 times. Dick Cheney famously said that in regards to tax cuts, deficits don’t matter – but they do matter. And lest us not forget, the second Bush’s tax cuts were followed by mediocre growth.

Of course spending must be cut in the US – it is at an all time high, close to 25% of US GDP on the federal government. But revenues are at an almost all time low of about 15% of GDP. The figures simply don’t add up.

A way has to be found to sensibly raise income – 4 out of 5 Americans accept this. None of this is easy. The darling of the right, Chris Christie, talks of “shared sacrifice”. He’s absolutely right. In the case of deficit reduction everyone is going to be affected in some way. 1 in 7 Americans now live in poverty – they will be severely hit in the reduction of entitlement programmes. The number of millionaires in the US increased by 8% last year. Is it too much to ask that they pay a little bit more, when marginal tax rates for the middle class and wealthy are lower than they were during Reagan’s second term?

The GOP needs to be careful here. The politician who wins the Presidency in 2012 will be the one who wins the middle ground. America is more moderate than many Democrats and Republicans would have us believe – let us recall how last year 215,000 turned up for the “Restore Sanity” rally of Stewart and Colbert, dwarfing Beck’s 80,000 or so. Elections are decided by independents.

The poll that struck me most before the mid-terms was that 80% of Americans wanted Republicans and Democrats to compromise, to work together. Obama is currently owning this rhetoric, casting himself as the centrist, declaring that he is willing to upset members of his own party to get to grips with the deficit issue. He is also listening to the majority of economists and the 4 out of 5 Americans who believe that deficit reduction cannot be tackled by spending cuts alone. Not to mention the 66% of Americans who believe that those who make more need to pay that little bit more right now.

It would be a shame if the GOP continues on this belligerent path, refusing to accept what is obvious to the majority of experts and Americans, something carried out by a Conservative led Coalition government in the UK… and the great President Ronald Reagan himself. They are better than this. Time to accept the obvious and get the job done.