This summer, fiscal conservatives in Washington hope to finally get down to the business of cutting federal spending. The stakes are sky-high but they have a real chance at success if they stay strong.
Their opportunity comes from the need to expand the federal debt limit so that government can continue to meet its obligations. Since about 40 percent of current spending is funded by debt, you would think the Obama administration has little choice but to negotiate with those who are demanding spending cuts — real cuts — as part of the deal.
But we’ve been here before. Several months ago, conservatives demanded spending reductions in exchange for passing a budget which the previous Congress neglected. They started out with a stated goal of $100 billion in cuts, a paltry 7 percent of this year’s deficit alone and less than one percent of our total debt. That eventually got pared down to $37 billion, and after they examined their prize, they found it was mostly fools’ gold. They were had. Counting personnel slots that were already empty and other “reductions” that were going to happen anyway, they probably got less than $1 billion in permanent spending cuts.
This time, Treasury Secretary Timothy Geithner is trying to pressure House Republicans into passing a “clean” bill. That’s his curious term for debt limit expansion without spending reform. His reasoning is that default would be catastrophic. Interest rates would soar as creditors began to doubt the once omnipotent United States. The dollar and stock market would plunge. An unprecedented world-wide debt crisis would ensue.
But if all we do is give ourselves permission to spend more money without changing our spendthrift ways, in two years or less we’ll be right back where we are today. The Obama administration stubbornly insists on pushing all spending cuts off into some fantasy future. For now, the pace of spending and debt accumulation continues to accelerate with plenty of money for railroads to nowhere, subsidized farmers’ markets for “food deserts” and other frivolities.
At times, the compulsion to spend can be baffling. The Left claims that the trillions out the door the last two years were necessary to turn around the sour economy. (How’s that working for you?) Yet they also refuse to consider reform of future entitlement liabilities, the one thing you can cut without fear of near-term impact on the economy.
Instead, while refusing to offer ideas of their own, Democrats savagely mock and attack Rep. Paul Ryan, who at least was willing to put some concrete ideas on the table. Their own re-election seems to be the only thing that matters.
Interestingly, credit markets aren’t responding much to Geithner’s hysterical predictions. Interest rates aren’t moving. As Stanley Druckenmiller, the renowned money manager, put it in the Wall Street Journal, he would actually welcome a delay in interest payments if he knew that “in exchange for that… I get massive cuts in entitlements and the government is going to get their house in order so my payments in seven, eight, nine, 10 years out are much more assured.”
So far, the House leaders are standing firm, holding to the principle of one dollar in budget cuts for each dollar of debt expansion. That’s a view so logical and understandable that it should garner considerable public support.
For their part Obama, and the Senate Democrats are refusing to budge on spending. Instead, they insist that “taxing the rich” is the key. That may play well politically, but it’s already been tried. According to economist Walter Williams, federal tax revenue is 23 times greater than in 1960 while federal spending is 42 times greater. The spending machine always outraces the available revenues. It must be stopped.
Moreover, we already have one of the most steeply graduated systems of taxation in the world. Tax rates on high earners are in the range where further rate increases seldom generate more net revenue.
Obama and his team have to cave eventually, especially if they believe their own doomsday scenarios. It’s extremely important that the right side decisively wins the upcoming stare-down. Otherwise, as Druckenmiller says, “we’re going to find ourselves being Greece somewhere down the road.”
• East Valley resident Tom Patterson (firstname.lastname@example.org) is a retired physician and former state senator