Avoiding the cliff and restoring confidence

New York Mayor Michael Bloomberg has proposed a sensible way forward with an Op Ed column, Avoid the ‘Cliff,’ Restore the Confidence in the December 12, 2012 edition of the Washington Post . His thesis is that businesses took on too much risk in the run up to the 2008 crash but now they are sitting on hordes of cash because they lack confidence that our political leaders can come up with a serious, credible plan to reduce the deficit and put our country on a sustainable path to economic growth and fiscal health.

His proposal for accomplishing this task is remarkably similar to that outlined by David Walker and discussed in my previous post on December 10, 2012.  That is, we should adopt the Simpson-Bowles framework, including tax increases and spending cuts.  At least a significant down payment on this plan should be agreed to before the end of the year.  The agreement would include a commitment to enact broader-based tax reform and entitlement reforms in 2013.

With trillion dollar deficits for four years in a row, now going on five, we definitely need more tax revenue as well as large spending cuts.  The biggest challenge in implementing this general framework is to figure out how to raise tax revenue in the least damaging way to the economy.

The tradeoff here is between raising tax rates versus eliminating tax deductions and loopholes.  Democrats (apparently) prefer raising tax rates rather than eliminating deductions.  This is unfortunate since it is well established in economic theory, as well as plain common sense, that the lowest possible marginal tax rates will provide the greatest stimulus to private risk taking and investment. This is the only sound way to create more jobs.

Democrats may have the strongest political position in the current negotiations but the Republicans have the soundest basic economic principles.  If the Republicans are able to keep the focus on the fundamentals, we will succeed in finding the way out of our current predicament.

2 thoughts on “Avoiding the cliff and restoring confidence

  1. Jack:
    For my own personal expenditures, I agree 100% with what you have proposed on the deficit and what we talked about. However, for the federal governement, this is a pipe dream. The projected 2012 deficit and GDP are $1.33 Trillion and $15.09 Trillion. The deficit is 8.8% of GDP. That is the initial payment of the deficit. As the deficit is spent and the money perculates through the economy ending up overseas, the actual impact on the GDP is probably closer to 20 or 25% GDP impact. The voters put Obama & Co. back in office because he, Harry Reid, and Pelose all want to continue the status quo. Even the mild reformations proposed by Romney were too much. The people don’t want it. History has shown that in the past, inflation was the tool of choice to get rid of national debt. As a rightous man yu’re on track and batting 1000. As a politition, you way out in left field.
    Your Fan and Friend
    Pierce Carpenter

  2. You are saying that our national leaders are so irresponsible that it will be impossible to solve our fiscal problems in a deliberate, rational manner. You predict that the most likely outcome is severe inflation to erode the national debt away. QE1, QE2, QE3 . . . You may be right. Another possible outcome is a mounting crisis as investors and other countries such as China demand higher and higher interest rates for purchasing our debt. I still think that our leaders will display the political courage it will take to address this problem. The sooner they act the easier it will be. Right now a $4 trillion Grand Bargain (over ten years) will suffice. A year from now we’ll be another trillion dollars in debt and it will be that much harder to change direction. To me it seems obvious what we need to start doing as soon as possible. If that put’s me out in left field, so be it!

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