Congress’ economic agenda: a pathway and a precipice

“The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. History shows that well-designed backloaded plans are credible . . .  Such backloaded deficit reduction would not hurt growth in the short run—and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful . . . ”

—Christina Romer, former Chairwoman of President Obama’s Council of Economic Advisers, “Now Isn’t the Time to Cut the Deficit,” The New York Times, October 23, 2010

Click on: http://www.nytimes.com/2010/10/24/business/24view.html?_r=2&ref=business

Last week the first shoe fell: the $4-trillion dollar debt-reduction plan of the President’s National Commission on Fiscal Responsibility and Reform. Tax reform, as well as spending cuts, including cuts in social security and —defense, are now being discussed. After fifteen years, low tax clichés are sharing air time with concrete ideas about raising revenues and cutting expenditure. The “$4 trillion thing,” as one analyst on PBS described it, is too big to ignore or chase out of the room with Pollyanna growth and revenue forecasts.

Leaders who used to get away with talk about “scenarios” are starting to look at ideas again. Being pragmatic people, Americans won’t long tolerate grand talk about a problem without action.

What is emerging is a shift from a traditional liberal agenda to a traditional conservative agenda that will put Republicans as well as Democrats in jeopardy. The draft plan by Allan Simpson, a former Republican senator, and Erskine Bowles, an ex-chief of staff to Bill Clinton, is careful to do nothing to impede the recovery in the short run and insists that its reforms would more fairly share the burden of American government. If moderate Democrats can even talk about raising consumption taxes rather than raising the highest marginal income tax rate, Republican leaders and presidential aspirants will have no credible choice but to come to the table on defense cuts and revenue-increasing measures.

(Leaving the highest marginal income tax rate at 35% would not be an unprincipled comedown for Democrats. After all, Canada’s highest rate on taxable income is only 29% and we find the money for universal public healthcare and other social priorities that Democrats envy. A plethora of exemptions and overreliance on the income tax are the big problems with the United States’ revenue base. Moderates, including environmentalists and many corporate lobbies, should come together and help design a new national consumption tax. The British Conservative budget just raised their VAT to 20%. Canada’s latest Conservative budget happily projects nearly $30 billion in revenues from the Goods and Services Tax (GST) next year, more revenue than it will collect from corporate taxes.)

Obama has many ways to show leadership, at home and abroad. His presidency can recover without significant congressional cooperation. Unlike healthcare, when he pestered Congress to address his agenda, he can now be an interested party, helping congressmen and congresswomen address a looming challenge they said they sought office to address. He can support their efforts and give them political cover or, with other Americans, shake his head and do what he can on his own.