UK: Go big, and go hard

The Economist

Large it up
America’s politicians look like missing a golden opportunity to restore the country’s finances

CONGRESS guards its privileges jealously, so when it agrees to delegate much of its power, even temporarily, the moment should not be squandered. That is why so much depends on its Joint Select Committee, a group of six Democrats and six Republicans drawn equally from the House of Representatives and the Senate, which has been charged with hacking away at America’s swollen deficit.

By November 23rd, this “supercommittee” is supposed to come up with a plan to save at least $1.2 trillion-1.5 trillion over the next ten years. Exceptionally, any plan it agrees on will not be subject to amendment, only to a straight up-or-down vote, and it will need only a simple majority in the Senate, not the usual 60 votes out of 100. And as a final incentive, if the package fails to get through, harsher and more immediate cuts will automatically be imposed, in ways that politicians of both stripes would hate. In short, if there was ever an incentive for Barack Obama’s party and its Republican opponents to do what they should have done a long time ago, it is this.

Few outsiders know what is going on inside the supercommittee, but even a minimum deal is by no means assured (see article). And in fact $1.5 trillion is not nearly enough. America’s predicted deficits over the next decade come to as much as $12 trillion, to be piled on top of an existing net national debt of around $10 trillion. A $1.5 trillion deal would see the debt burden go on rising, even if the economy resumes a normal rate of growth, so yet another deal would have to be reached later on. Hence the argument for “going big” now—concocting a deficit-reduction package of $3 trillion or ideally $4 trillion, big enough to convince investors that America’s long-term problem is being tackled (and thus also leaving more room for the short-term stimulus the economy still needs).

To get to such a big figure two things must happen, one unwelcome to the Democrats, one hated by Republicans. First the Democrats would have to put entitlements, the legally mandated programmes of Social Security (pensions), Medicare (health care for the elderly) and Medicaid (health care for the poor), on the table. Pension reform might very well be possible; there is widespread agreement that the pensionable age needs to rise and that benefits will have to be means-tested. But the far bigger problem is health entitlements, and the Democrats, having only just conducted an enormous health-care reform in the teeth of Republican opposition, are deeply reluctant to do anything that might reopen that deal.

The other problem is taxes. No rational person believes that serious deficit reduction can be accomplished without any rise in tax revenues. The Republicans objection to tax rises is well known, but may not be absolute. The idea of raising tax rates is clearly going to remain anathema. But the tax code is such a morass of loopholes, breaks for the politically favoured and economic engineering on the part of bureaucrats, that comprehensive tax reform could allow for lower rates and yet increase tax receipts at the same time.

Go big, and go hard

Mr Obama and the House Speaker, John Boehner, discussed just such a grand bargain back in July, before the anti-tax wing of the Republican Party took fright. Divided government actually favours the taking of painful decisions more than the unified kind does, because both parties are required to sign on, and no one can take political advantage. In recent years, many of America’s hardest decisions—including welfare reform and previous rounds of budget cuts—have been taken at times when the presidency and Congress were in different hands. It would be wonderful if that happened again.

http://www.economist.com/node/21538150