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I think that the frame we’re using for our budget discussions is all wrong. We’re looking at 2009 through 2011, when the economy is in severe stress. We should be looking at ordinary times and how to get back to them.

The GOP is pursuing policies which will increase the deficit by cutting spending, lowering demand, slowing the recovery, and extending the recession

There are many reasons for the current annual deficit of $1.7 trillion. Revenues are down over $700 billion from 2007, while unemployment and related services are up about $350 billion. We’re spending $175 billion in stimulus money this year. The Great Recession is responsible for $1.225 trillion of the $1.7 trillion total.

We’re spending somewhere over $125 billion in the wars. There is no way we can win in Afghanistan – the enemy is providing security for our supply convoys.

Removing these expenses leaves a deficit of $350 billion – less than the cost of the Bush Tax Cuts.

To return to a balanced budget, we need to get unemployment below 6%, finish the wars, and find $350 billion.

One way is to repeal the Bush Tax Cuts. Revenues are at a rate of 14.9% of GDP, which is the lowest since 1980. Taxes are at historically low levels.

Another is to repeal the tax cuts for those making over $250k, adding $70 billion in revenue. Add a Financial Transaction Tax for another $100 billion. Cut military spending $150 billion. Done.

Another approach is to cut entitlements – move the burden from the government to the individual. Social Security and Medicare are programs that are a contract with the citizens. Taxpayers are paying for these programs. Social Security has produced more revenues than expenses until the Great Recession and has not added a penny to the deficit.

Social Security can be funded simply by eliminating a tax cut for the rich – removing the cap on income subject to the tax.

Medicare and Medicaid are the long term problem. Medicare pays out about $200 billion ($2.7 trillion costs vs. $2.5 trillion revenues in 2007) more a year than is taken in. Raising Medicare taxes by 8% would eliminate this shortfall in the short term. In the long term, we must transform our health care program. No other industrialized nation pays half of what we do for medical care, and none lack universal care.

The GOP wants to cut expenses NOW. This will have the effect of raising unemployment by somewhere around 700,000 jobs. This will reduce revenue and increase expenses. IF this policy is followed, the cuts will increase the deficit without increasing employment. How will this lead to recovery when it also decreases demand? $1 trillion a year of our current problem – lower revenues and higher expenses – remain, so the deficit will go on for years, adding over a trillion a year to the deficit until the economy recovers.

Assume that the GOP’s plans are put into place. The GOP plan will immediately result in the loss of several hundred thousand jobs and remove safety nets, resulting in the lowering of demand.  With lower demand, there is little reason to assume that the economy will not still have 9% unemployment for five more years. If the unemployment rate stays at 9% and does not go higher, there will still be a $1 trillion shortfall each year resulting from the bad economy.

In five years, what do you have? $20 trillion in national debt and a country still on the edge of a recession - or depression - and still adding $1 trillion a year to the debt.

IF we add $2 trillion in additional stimulus into the economy over the next three years, we should create or save 7.5 million jobs (based on the CBO evaluation of the original stimulus program). This would lower the number of unemployed from 13.9 million to 6.4 million and the unemployment rate from 8.9% to 4.1%.  Demand is increased, revenues are increased, expenses are reduced.

In five years, what do you have? $20 trillion in national debt and an economy that is healthy enough to be paying down the debt. In the most extreme case, the economy may get overheated from the rapid expansion, and it could be argued that tax increases would necessary to cool off the economy.

The best way to reduce the deficit is to make the economy healthy by increasing demand. Cutting spending is the worst thing you can do in a recession. We can invest our way to a healthy economy, or we can stay with the policies that got us in this mess.

Originally posted to FullChat on Fri Mar 11, 2011 at 01:34 PM PST.

Also republished by Community Spotlight.

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Comment Preferences

    •  actually the hidden cost of the defense department (5+ / 0-)

      budget is more like 1.3 trillion.  There was an excellent diary on this a while back i will try my search fu and see if i can find a link.  I am pretty sure you are just talking about the war budget, but the defense budget as a whole needs to be looked @

      I am the flail of God. Had you not commited great sins, God would not have sent a punishment like me upon you. - Ghengis Khan.

      by wargolem on Fri Mar 11, 2011 at 10:02:16 PM PST

      [ Parent ]

      •  well found some... (1+ / 0-)
        Recommended by:
        HoundDog

        http://progreso-weekly.com/...

        from a progessive blog and even the cato institute is now calling on the government to make responsible cuts to the defense budget.

        The top link shows that in 2010 the total spending on defense was about 1.2 TRILLION.  I believe the deficit works out to about 1.5 TRILLION... see the correlation?

        I am the flail of God. Had you not commited great sins, God would not have sent a punishment like me upon you. - Ghengis Khan.

        by wargolem on Fri Mar 11, 2011 at 10:17:13 PM PST

        [ Parent ]

        •  Returning the defense budget to pre-9/11 (3+ / 0-)
          Recommended by:
          global citizen, satyrday, supercereal

          levels is the best starting point.

          We should not be looking at cuts to Social Security and Medicare, until and after we've taken $200 billion a year of of defense and returned taxation to Clinton era percentages.

          Clinton handed Bush a budge in surplus.  Bush destroyed this with tax cuts for the rich, and enormous unfunded increases in the defense budget.

          Why are we still paying so much for the defense of Europe from a Soviet tank blitz?   And keeping so many troops there?

          We need a minimum 50% tax on income over $100 million, then talk to us about cuts to social programs for the poor!

          The means is the ends in the process of becoming. - Mahatma Gandhi

          by HoundDog on Fri Mar 11, 2011 at 10:25:02 PM PST

          [ Parent ]

      •  defense spending doubled under W (0+ / 0-)

        And that's not counting the wars, which at the time were off the books.  Who knows what we're spending that money on - it certainly wasn't armor for the troops.  I'd guess it's mostly mercenaries (who we pay 4 times what we pay soldiers even thought our soldiers are far more effective) and boondoggle for the defense contractors.

        Put defense spending back to Clinton-level eras and you've knocked the deficit way down.  Put defense spending and taxes back to Clinton-level eras and we're running a surplus again.

        When they came for the manufacturing jobs, I remained silent; I did not work in manufacturing. When they came for the unions, I remained silent; I was not in a union. When they came for me, there was no middle class left to speak out.

        by schroeder on Sat Mar 12, 2011 at 05:59:13 AM PST

        [ Parent ]

  •  Thank you for a rational and sensible diary. (6+ / 0-)

    It really shows the insanity of the Republicans. They aren't interested in cutting the deficit or debt. They're interested in destroying the government.

  •  Agree with your policy, but not your frame. (2+ / 0-)
    Recommended by:
    HoundDog, jan4insight

    I agree that your policy subscriptions are the best way to fix the economy and "fix" the budget.  However I think your "frame", as you put it, is wrong.

    Budget Deficits Don't matter because ever since we went off the gold standard there is no budgetary constraint other than inflation.  The only reframing we need to do is to get everyone to understand that a budget deficit by itself is not a problem.  It is only a problem if inflation exists.  THEN we can win the argument.

    We need to be the "party that provides government services" vs. "the party that wets it's pants worrying about a fictional budgetary constraint".

    Our Dime Understanding the U.S. Budget

    by maddogg on Fri Mar 11, 2011 at 02:09:00 PM PST

    •  I'm pretty sure inflation (3+ / 0-)
      Recommended by:
      taonow, schroeder, HoundDog

      already exists.  Soaring food and fuel prices, commodities on an exponential rise, etc.  It's only time before the CPI reflects this.  Meanwhile, QE2 continues to monetize the debt.

       Am I the only one that's worried that the price of gas is at the same price as it was BEFORE the recession started and the economy was still rocking?  Now our economy is on life support and low and behold, even though demand for oil throughout the world has decreased,  the price of oil has increased.

      That just might have something to do with oil being tied to the dollar (dollar denominated commodity).  So great, we've increased the money supply, so our debt is easier to pay off, and we can keep running spending in the red.  Only problem is, the rest of the world is getting tired of the dollar as the reserve currency, and countries like China have begun to shed the dollar.  The obvious effect of more dollars on the market is a purchasing power decrease.  

      But that's okay.  Let's keep printing money so that the price of gas will continue to go up.  That'll really help out the poor.  They're just itching to pay more for gas and buy less of....well, you know, luxury items like food.

      •  Yup (0+ / 0-)

        As far as I know, no country has ever spent its way to prosperity.

        The current policy is to debase the currency, which rarely, if ever, ends well. But of course no one will believe that until the "end" arrives, then they will say "who could have known".

        "I can live with doubt and uncertainty and not knowing. I think it's much more interesting to live not knowing than to have answers which might be wrong". Feynman

        by taonow on Sat Mar 12, 2011 at 05:42:52 AM PST

        [ Parent ]

      •  We're off the gold standard and on an oil standard (0+ / 0-)

        That's the real measure of how much our money is worth - how much oil it buys.

        When they came for the manufacturing jobs, I remained silent; I did not work in manufacturing. When they came for the unions, I remained silent; I was not in a union. When they came for me, there was no middle class left to speak out.

        by schroeder on Sat Mar 12, 2011 at 06:01:02 AM PST

        [ Parent ]

  •  I favor monetizing the debt at about 3% to 4% (0+ / 0-)

    which, admittedly is a transfer of wealth from savers to consumers.

    But, not as bad and regressive as trying to balance the budget on the backs of the poor, and those without health care, food, or shelter, which is what the GOP wants to do now.

    Democrats err when they get sucked into these needless cuts.

    We should agree we going to spend 25% of GDP on government and then argue how to allocate it.  I favor full allocations and even expansions of current social programs, and making up the difference with defense cuts and progressive taxation.

    If we can't get progressive taxation through the political system, let's do it secretly with quantative easing the way we always have.

    The means is the ends in the process of becoming. - Mahatma Gandhi

    by HoundDog on Fri Mar 11, 2011 at 10:29:13 PM PST

  •  What needs to be done (7+ / 0-)

    The budget deficit is primarily related to the following causes:

    1.  Extremely high spending on the military industrial complex

    2.  Inequitably low taxation of rich individuals and large corporations

    3.  The looting of the US economy by the banksters

    The prescription for curing the major problems is to tackle every one of these causes:

    1.  Bring the troops and all their gear home from Iraq and Afghanistan as soon as we reasonably can.

        1a.  Reconfigure the US military into a defensive force and drop all claims to military world domination.

    2.  Enact taxation rates similar to those of the post WWII thru JFK eras.

    3.  Prosecute the financial sector looters of the American economy and get the trillions back from the banksters who stole it from us, the people.

    "11 dimensional chess" is a clever form of using magical thinking to obfuscate the obvious.

    by Zinman on Fri Mar 11, 2011 at 11:07:37 PM PST

    •  All excellent points (4+ / 0-)
      Recommended by:
      taonow, ybruti, schroeder, supercereal

      Unfortunately, it is the military industrial complex, the rich and large corporations, and the banksters who make the rules.  Until their money is out of elections, no politition will ever be elected who doesn't bend to their will.  Observe how beholden our current president is to the status quo of tax cuts and give-aways for the financial sector.  They fund the elections of both parties, they get to call the shots.

    •  If we ever have an Egypt-style revolution... (0+ / 0-)

      ...I think our list of demands is already written.

      When they came for the manufacturing jobs, I remained silent; I did not work in manufacturing. When they came for the unions, I remained silent; I was not in a union. When they came for me, there was no middle class left to speak out.

      by schroeder on Sat Mar 12, 2011 at 06:02:30 AM PST

      [ Parent ]

  •  Uhm (1+ / 0-)
    Recommended by:
    ybruti

    You have a lot of the policy prescriptions right, but yu miss the urgency of the mess.

    We should be looking at ordinary times and how to get back to them.

    What if "ordinary times" don't come back?
    What if "ordinary times" were in fact an aberration?
    What if the growth of the last 30 years was due to the piling up of excessive debt, and can not be continued, or returned to?

    In order to spend during a recession, one has to have built up a reserve in good times. This never happened. There is no reserve to fall back on, only a hole to dig deeper.

    The flaw in your argument is simple. It has to do with interest rates. They were kept too low for too long (causing much of the debt explosion) and now are continuing to allow more and more debt to be built up - after all who can't afford to borrow more if interest rates are near zero. In fact interest costs last year were only the third highest on record, despite record high debt.

    IF and WHEN the economy gets better, rates will have to rise. When they rise interest costs on the debt will spike (especially as the US now funds so much debt short term - so rates reset quite quickly). The higher interest costs will make reducing the deficit even harder.

    My Plan: Stop waiting for things to get better, they won't. The economic engine needs a major overhaul, a tune-up is insufficient. Unfortunately I now realize it is no longer possible to "hope for audacity".

    For now the US is protected from facing reality by having the world reserve currency. But, a crisis will eventually come, and when it does the US will lose control over what gets cut, and what gets kept. It will not be pretty.

    "I can live with doubt and uncertainty and not knowing. I think it's much more interesting to live not knowing than to have answers which might be wrong". Feynman

    by taonow on Sat Mar 12, 2011 at 05:07:35 AM PST

  •  A war surtax. (1+ / 0-)
    Recommended by:
    ybruti

    A 25% extra tax on any and all income specifically on those who use their media mouthpieces to encourage military action. If you call for an invasion of Iraq, you pay the tax. If you are on the Board of directors of a foundation that pushes for war, (AEI for example) you pay the tax.If you push for war you pay extra for it. Probably wouldn't raise much revenue but it would be gratifying.

    "Education is dangerous - Every educated person is a future enemy" Hermann Goering (NRSC?)

    by irate on Sat Mar 12, 2011 at 05:57:02 AM PST

  •  The Deficit needs to be addressed, (0+ / 0-)

    and its a shame Progressives haven't taken this issue as their own.

    We can start by not paying 5000% mark-up for prescription drugs. link

    We all know the GOP is full of shit, they don't want to now, nor have they ever wanted to cut spending

    This is the issue we must lead on

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