Winston Churchill once said, “You can always count on Americans to do the right thing-after they’ve tried everything else.” America has a very weak economy. 9.1% of American workers are unemployed, and 28% of all homeowners cannot repay their mortgages. Politicians are trying everything to fix this economy except the right thing. This is quite evident when 74% of the country thinks America is on the wrong track, and Congress has an 84% disapproval rating (NYTimes/CBS Poll).
Political analyst Andy Friedman gave a lecture in Orange County on Washington politics. He is a proclaimed expert on all things political and writer of The Washington Update. He predicted what will happen in Washington within the next couple of years. He started with the facts of the current situation.
The United States’ $1.3 trillion budget deficit is preventing Washington from addressing America’s pressing economic problems. The government spends $3.6 trillion a year. The United States income is $2.3 trillion a year. The deficit is 9% of the United States GDP and is unsustainable. It is unsustainable because the countries who fund our deficit (mostly China) say they will not fund it much longer at these high levels. If we do not solve this problem, China and others will stop lending the US money, and the US will have to offer higher interest rates, ultimately, leading to higher deficits.
As Churchill predicted, initial attempts to curb the deficit this year have been too little and unsuccessful. Republicans refuse to consider any solution that includes tax increases and are advocating further tax reductions complied with reduced government spending. The Democrats position combines spending cuts with selective tax increases for those with the highest incomes.
In April, the government was on the verge of shutting down because the Democrats agreed to “only” $10 billion in cuts, and the Republicans wanted $60 billion. The government was nearly shut down over whether to cut 0.8% of the deficit or 4.6% of the deficit. This was not an attempt to solve the problem, and in the end, they cut the deficit by only 2.9%. They were arguing over pennies.
The Democrats and Republicans still did not cooperate a few months later. In June, the United States government was on the verge of defaulting because Republicans did not want to raise the debt ceiling (The constitutionality of which will have to wait for another article). This led to huge talks debt talks. Speaker of the House, John Boehner, and President Obama had a Grand Plan ready, but Boehner due to political pressure. This proposal would reduce the debt by $4 trillion. The tax cuts for people who make more than $250,000 would expire. Medicare eligibility would rise from 65 to 67, and the rich would pay more for Medicare. Lastly, Social Security growth would be reduced.
The final plan calls for a bipartisan bicameral congressional committee has until Thanksgiving to get only $1.5 trillion in deficit savings over the next 10 years. If this fails, then $1.2 trillion in spending cuts will trigger automatically. These cuts will come equally from domestic and defense spending. Friedman predicts that it is very unlikely that this committee will reach a consensus. If they could not get along in April over $60 billion, how will they agree to $1.2 trillion? Besides, this $1.2 trillion in cuts over the next ten years (only $120 billion per year) does hardly anything to reduce the deficit. To address the issues both sides of the equation require attention; entitlements need to be cut, and taxes need to be severely increased on higher incomes.
The problem with this situation is the Republican plan to cut the deficit is good thinking in the long run, but it is anti-jobs. The balanced budget approach can only work after the United States is out of a recession. Government needs to spend to stimulate the economy because private industry is not going to invest in a weak economy for fiscal purposes. Government does not need to make a profit; thus, it can make an investment in the weak American economy as opposed to private industry not investing. One can see the truth in this statement by looking at the United Kingdom’s economy. They have lapsed back into a recession as the conservative government relies solely upon cuts in spending.
On December 31st, 2012, the Bush tax cuts will expire, and the deficit will be reduced as a result. Regardless of who wins the 2012 election, on that date, Barack Obama will be the president with a Republican House and a Democratic Senate. Barack Obama will have a lot of negotiating power over Republicans because Obama does not need to renew the Bush tax cuts. Obama may negotiate a grand deficit reduction plan. More likely, Friedman predicted, Obama will not negotiate with the GOP and simply let the tax cuts expire. However, when the tax cuts expire, taxes increase across the board. This will not cause much economic harm because tax increases do not prevent investment, if anything, they ensure government investment. It will mainly impact middle and lower Class families.
Can this scenario be avoided? Can Congress discover compromise and adopt a plan that reduces the deficit? Hopefully, congress does not harm America any further and learns that a mixture of cuts and tax increases must be instituted to fix the budget deficit. Democrats will need to cap Social Security growth and raise the Medicare age. Republicans will need to agree to tax increases for the rich. Lastly, there can be no more political gimmicks and sideshows. For example, House Republicans must stop focusing on trivial social issues such as abortion. They have a 22% approval rating and a 69% disapproval rating (Fox News Poll). If politicians do not change within a year, Congress may see a lot of freshmen in the 2013-2015 session.
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