Jobs, The ECONOMY & the Federal Budget
The President’s Policies Result in a Credit Downgrade | Why the Burgeoning Federal Debt Threatens the Economy and Costs Jobs | A Year of Mixed Results | Creating Jobs and Promoting Economic Recovery
In a February 14, 2012 editorial, The Wall Street Journal assessed the four budgets President Obama proposed since taking office, including the budget for the upcoming fiscal year. Below are some highlights from that piece:
- “Four years of spending of more than 24 percent of GDP, the four highest spending years since 1946. In the current fiscal year of 2012, despite talk of austerity, Mr. Obama predicts spending will increase by $193 billion to $3.8 trillion, or 24.3 percent of GDP.”
- “Another deficit of $1.327 trillion in 2012, also an increase from 2011, and making four years in a row above $1.29 trillion. The last time that happened? Never.”
- “Revenues at historic lows because of the mediocre recovery and temporary tax cuts that are deadweight revenue losses because they do so little for economic growth. The White House budget office estimates that for the fourth year in a row revenues won’t reach 16 percent of GDP. The last time they were below 16 percent for any year was 1950.”
- “All of this has added an astonishing $5 trillion in debt in a single Presidential term. National debt held by the public – the kind you have to pay back – will hit 74.3 percent this year and keep rising to 77.4 percent next year.”
Last summer, Standard and Poor’s lowered the nation’s credit rating, citing the “current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook” (more later on the missed opportunities).
Even China has urged the U.S. to “take responsible policy measures to handle its debt.”
Yet, President Obama’s only idea? Raise taxes. Not to balance the budget, but to continue expanding the government’s reach into Americans’ lives, and to keep spending more and more. As The Wall Street Journal pointed out, “despite its tax increases, the White House still predicts that the annual budget deficit will be $901 billion in 2013 and never fall below $575 billion in any of the next 10 years.”
The president’s policies not only led to a downgrade of the nation’s credit rating, but they have taken a toll on American households as well. Unemployment continues to hover at unacceptably high levels, gas prices have doubled, health insurance costs are up, and too many people are still facing foreclosure.
The fact is, the president’s policies are doing more to slow down the economic recovery than to accelerate it.
So what should we do instead? First, the federal government should cut spending and reduce the federal budget deficit. Second, we need to promote pro-growth economic policies that will roll back or eliminate myriad new regulatory burdens imposed by this administration, extend current tax rates on personal income, dividends, and capital gains (rates that are otherwise set to snap back to levels even higher than those in effect more than a decade ago), reduce the corporate tax rate (which is now the highest in the developed world), extend death-tax relief, open more foreign markets to American products, and adopt a national policy in support of affordable energy that begins with responsible development of domestic energy resources.
The Obama Administration is spending trillions of dollars we do not have on things we can’t afford and don’t need – and all of the borrowing required to fund those things is threatening our nation’s long-term economic health. Every dollar the federal government borrows is a dollar that cannot be invested in new business enterprises, which create jobs.
To understand just how much the government is spending, consider this: 40 cents of every dollar the government spends will have to be borrowed. To put that into perspective, it’s like a family earning $60,000 and borrowing another $40,000 every year in order to maintain a $100,000-a-year lifestyle. It’s easy to understand why such borrowing cannot be sustained for long without disastrous consequences.
That is because the government can’t just print extra money to cover that shortfall. If it did, we would be suffering rates of inflation beyond most of our imaginations. So it has to borrow the money – from savers, investors, pension plans, and even foreign governments like China. And, as any borrower must do, it must pay interest on that debt – an estimated $224 billion in net interest payments during this fiscal year alone. That’s more than discretionary spending on education, training, employment, social services, transportation, natural resources, the environment, and agriculture combined.
We have no choice but to pay that interest or lenders will stop providing the money the government needs to pay its bills, whether for health care, education, environmental protection, defense, or law enforcement.
The problem is, interest payments will rise rapidly in coming years along with the debt that is accumulating under President Obama’s budgets. Whereas interest on the national debt will amount to about $224 billion this year, it will more than double by 2018 – to an estimated $459 billion. In a decade, interest payments could exceed spending on all other mandatory programs (except Social Security).
What does this mean for the average American family? Well, in order to finance these rising interest payments, Congress and the president will either have to impose crushing new taxes, drastically cut federal spending on domestic programs and national defense, or borrow even more (though that would simply add to the debt and lead to even higher interest costs).
Each of these options means that American families can expect a lower standard of living and less back from their government every year. Less of every dollar of tax that they pay will be available for Social Security, Medicare, education, veterans’ services, nutrition aid, defense, and unemployment assistance, while more of every dollar will go just to pay interest on the national debt, and much of that will end up in the hands of foreign lenders.
Unless Americans are willing to work harder and harder for less and less – and I doubt they are – we have to reduce deficit spending to manageable levels and ultimately learn to live within our means, and the sooner the better. Otherwise, today’s spending spree is destined to leave less for tomorrow. That means a lower standard of living for us, not to mention our children and grandchildren.
Wrapping Up Work on the FY2012 Budget
Before control of the U.S. House of Representatives changed hands in 2011, the president could count on both the House and Senate, under the control of his party, to pass his legislative agenda (the Senate is still in his party’s hands). He got the stimulus bill he asked for, the huge spending increases he requested in his budgets, his health-care bill, and expensive new financial regulation and food bills, to name a few. In just the first two years of President Obama’s term, Congress increased discretionary spending by a whopping 24 percent.
After control of the House changed hands in 2011, the new majority there set out to complete work on a budget for the rest of the fiscal year. The House eventually passed a continuing resolution that would have made a down payment on deficit reduction – cutting $61 billion from the $1.3 trillion deficit for the year – but even that was too much for the president and his allies in the Senate. It failed in the Senate on a vote of 44 to 56 (I voted aye). The compromise that ultimately passed cut just $38 billion.
The Biden Commission
By May 2011, the president’s spending policies had pushed the national debt to its statutory limit of $14.3 trillion, so he asked Congress to raise the limit with no strings attached. Not even enough members of his own party were willing to go along.
Since the debt limit had to be raised in order to avert a default on obligations the nation had already incurred, President Obama invited a small group of House members and senators to participate in bipartisan negotiations, chaired by Vice President Joe Biden, to see what compromise might be possible. I was appointed to serve on that commission, and one thing we tried to do was match any increase in the debt limit with dollar-for-dollar reductions in government spending. It quickly became clear, though, that the talks would not succeed when the president’s negotiators would not even agree to easy steps to cut waste, fraud, and abuse unless we raised taxes to match the savings. They even insisted on spending increases for pet programs.
Not surprisingly, the talks collapsed.
The Budget Control Act
Congressional leaders subsequently drafted a plan of their own without the president’s involvement. The Budget Control Act (BCA), which passed in August 2011, coupled an increase in the debt limit with cuts in spending totaling $917 billion over 10 years (to be achieved almost exclusively by tough caps on discretionary spending, though the details must still be filled in when Congress writes annual appropriations bills in the future).
The act also established a Joint Select Committee on Deficit Reduction, which was charged with finding an additional $1.2 trillion in savings over the next decade. The law further provided that, should the committee fail to reach an agreement, the savings would still be achieved through automatic across-the-board spending cuts (divided evenly between defense and non-defense programs).
The Joint Select Committee on Deficit Reduction
I was appointed by the Senate minority leader to serve on the Joint Select Committee on Deficit Reduction, a bipartisan group of six House members and six senators.
The group found itself plagued by the same conflict as the Biden commission, with one side seeking spending cuts and the other demanding tax increases as well as increased spending.
To see if there was any basis for a meaningful compromise, several of us proposed a plan to cut spending by $750 billion and raise $500 billion in additional revenues, including through new fees and the sale of federal assets. We even proposed that the revenues include $250 billion in tax increases on the wealthy, in the context of tax reform that would lower rates and eliminate special tax breaks. Our offer was rejected.
In a last-ditch effort, we proposed $600 billion in savings that both parties had previously agreed were sensible. But even that was rejected because it wasn’t coupled with substantial tax increases. With that, the deadline for reaching an agreement passed.
Now, unless Congress and the president can come up with a plan to achieve the required savings by the end of 2012, automatic spending cuts (known as “sequestration”) will begin next year. That will have a disproportionate effect on defense, which, despite representing less than 19 percent of the budget, will take 50 percent of the cuts. Defense Secretary Leon Panetta has warned that these additional reductions “would have devastating effects on our national defense.”
Payroll Tax Holiday
President Obama fought for, and won, an extension of the Social Security tax holiday through the end of 2012. While that means that working Americans can count on an extra $20 a week for the rest of the year, it will also erode the financial underpinnings of Social Security, which relies on those payroll taxes to pay out benefits.
Arguing against the President’s plan, even the National Committee to Preserve Social Security and Medicare warned: “Extending and expanding the payroll tax cut further endangers Social Security’s financial integrity.”
There are better ways, in my view, to provide tax relief to help spur economic recovery than to deprive Social Security of the revenue it needs. I voted against the president’s plan when it came before the Senate in February.
Citing Harvard economists Alberto Alesina and Silvia Ardagna, the editor of The Weekly Standard summed up what an effective economic recovery plan would do: “You want to stimulate economic growth and job creation, then cut tax rates across the board. You want to reduce the budget deficit and slow growth of the national debt, then cut spending.”
The following are just some of the policies that I support to accelerate the recovery and put people back to work:
First, Avoid Job-Killing Tax Increases
Unless current tax rates are extended, they are set to automatically increase at the end of this year. The tax rate for those in the lowest income-tax bracket will rise from 10 percent to 15 percent – a 50-percent increase. The tax rate on capital gains will climb from 15 percent to 23.8 percent, and the dividend rate will nearly triple to 43.4 percent. Existing tax rates ought to be extended or made permanent.
Reform the Tax Code to Promote Job Creation and Economic Growth
Congress and the president need to unite behind policies that will provide new incentives for entrepreneurs to invest in new plants, equipment, and workers. Such policies include:
- Simplifying and reducing individual income tax rates;
- Reducing the corporate tax rate, which is the highest in the world;
- Moving to a territorial tax system like our international competitors, something that will help increase exports and investments in the U.S.;
- Permanently reforming, or preferably eliminating, the death tax; and
- Reducing taxes on capital gains and dividend income.
Encourage Retirement Savings
Because Americans are living longer, many seniors are at risk of outliving their retirement savings. Many Americans do not have access to a 401(k) or similar plan at work, and current rules allow only $5,000 per year ($6,000 for those age 50 and above) to be set aside in a traditional or Roth Individual Retirement Account (IRA). In addition, the law requires seniors to begin withdrawing their retirement savings from their 401(k) plans or traditional IRAs at age 70-and-a-half under a complicated formula, regardless of whether they are healthy and may live for many years to come, and regardless of whether it would make better economic sense for them to withdraw the funds at a later date. I support initiatives to waive these forced withdrawals and raise contribution limits.
Promote Free Trade and American Exports
According to the most recent data from the Office of the U.S. Trade Representative, 27.3 percent of all manufacturing workers in Arizona depend on exports for their jobs, and foreign-controlled companies employ 76,500 Arizona workers.
Obviously, our state benefits from free trade policies that remove overseas barriers. I’ve supported trade agreements with such nations as Colombia, Panama, and South Korea, and I will support others that open new markets for the goods and services that Arizonans produce.
Increase Production of Domestic Energy Resources
I support greater exploration and development of domestic resources – including natural gas, nuclear energy, and oil shale in the West, as well as oil reserves off our coasts and on the Arctic plain – as ways of increasing jobs and promoting greater energy security. I also support construction of the Keystone XL pipeline in the Midwest. More abundant supplies of domestic energy will help moderate the cost of energy for American families and allow businesses to put more resources toward jobs and business expansion.
Re-establish Fiscal Discipline
I believe Congress must limit federal spending and reduce the burgeoning federal deficit. By reducing the amount of government borrowing, we can free up capital for investment in the private sector, which is the engine of our economy. I voted for a federal spending limit as part of the balanced budget amendment to the Constitution last December.
