The Dangerous Fiscal Path That Looms Before Us.

Dangerous is the path we seem to be headed for: leaving in place all or most of the Bush tax cuts; patching the alternative minimum tax and averting cuts in Medicare reimbursements for physicians; and suspending the automatic spending reductions triggered by the failure of the debt reduction supercommittee. Under this path, by 2022 public debt would be nearly 100 percent of the gross domestic product, a level not seen since just after World War II. Staying on this path will make us look like Greece by 2025.
This is the likely scenario because the two parties largely agree on the biggest component of the additional debt — extending the Bush tax cuts for those making less than $250,000 a year. It is the most perilous because the economy cannot shoulder a debt of that magnitude without potentially catastrophic consequences. The dumb path would avoid the above dangers in a stupid way. It would follow current law, not current policy. Thus, all the Bush tax cuts would expire at the end of this year. The alternative minimum tax would hit a growing number of taxpayers. Medicare doctors would see their payments reduced by 27 percent in March and more in future years. Also in this scenario, the supercommittee failure would result in cuts of nearly $1 trillion to defense and domestic spending.
This path would drive debt to a manageable level — 62 percent of GDP — by the end of the 10-year window. The deficit would fall from 7 percent of GDP this year to well under 2 percent in 2015. But it would apply a dangerously sudden brake to the economy and leave in place poorly constructed tax and spending policies.A large portion of the economic and human costs of the recession and slow recovery remain ahead,” the CBO said, and “those costs fall disproportionately on people who lose their jobs, who are displaced from their homes or who own businesses that fail.” An immense, across-the-board tax increase coupled with sudden spending cuts would make that situation worse.

The least dumb path would deal with the debt in a way that is gradual, balanced between spending cuts and revenue increases and intelligently targeted rather than the current law’s bludgeon. This is the path outlined by debt reduction commissions such as Simpson-Bowles. Unfortunately, it is not the subject of the current debate.

President Obama has called for a balanced solution but has neither proposed serious tax reform nor adequately outlined the ways in which he would get entitlement spending, particularly Medicare, under control. The position of most Republicans, on the presidential campaign trail and in Congress, is wildly less responsible. They imagine a world in which the debt can be tamed by spending cuts alone;  the Republican presidential candidates call for trillions in additional tax cuts beyond extending the expiring ones.

To hope that the CBO report might chasten policymakers is probably too much, but even a glimpse of its conclusions ought to cause them to rethink their approaches.

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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