Too Much Spending or Too Little Taxes?

By Edelman and Flinchbaugh

© Copyright Agri-Pulse Communications, Inc.

ME. Fiscal policy is more than passing a balanced budget amendment.  The top priority in this business cycle is to keep the economy in recovery. If economists and business leaders don't soon educate the citizenry, we're in danger of a downward spiral started by government spending cuts, higher unemployment, consumer uncertainty, less spending, and tax revenue declines that generate another round of government spending cuts, and so forth until we wise up.

BF.  Have you joined the liberal wingnuts?  The President's own Debt Commission clearly spelled out that our nation cannot continue to live beyond its means, perennially spending more than we collect in revenues and borrowing from the rest of the world.  Our credit rating downgrade is a warning.   However, the U.S. economy is 22% of the world's economy and the dollar is a key international exchange currency.  Business needs a stable and predictable tax system and regulatory environment--not one with constant changes in environmental regulations, health care, and tax laws. It is political uncertainty not economic uncertainty. There are trillions uninvested and unloaned just waiting on the President and the Congress to quit acting like 2 year olds playing in a sand box.

ME.  Have you joined the Tea Party zealots?   Our budgets were last balanced during the 1990s before we cut taxes and before we involved ourselves in two wars.  Social Security has always been a system where current workers pay for current retiree benefits.  Only difference is that in 1950 we had 16 workers paying for every retiree, now we are down to three workers paying for each retiree.  Yes the "Boomers" are swamping those born in the "baby bust."  But, think about this.  If we don't correct the imbalances in Social Security, Medicare, Medicaid and Defense spending, all future non defense discretionary spending on Farm Bill safety nets for farmers, school lunches for poor kids, soil and water conservation programs for environmentalists, and rural development and renewable energy programs for rural communities are at risk.

BF.  Keeping the U.S. ratio of debt to gross domestic product at current levels until 2085 would require spending cuts, tax hikes, or a combination of both at the $6-10 trillion level over the next decade--more than double what Congress is considering in 2011.  As far as the Farm Bill debate goes, commercial agriculture has always seemed to come out on top in the past.  The clout of commercial agriculture and the safety net have actually grown as farm numbers declined. Cuts are coming, but not disproportional.

ME.  With near record farm income, farmers should consider setting aside more farm income in liquid assets now for down years in the future.  If their safety net is invested in bidding up farmland values, when the bubble breaks asset values may decline more quickly than liquidity can be increased.  In past debates, Congress debated the Farm Bill in the Ag Committees before making the final budget and appropriations decisions.  In the upcoming Farm Bill, budget decisions will drive the Ag Committees and the decisions will be made by the 12-member Special Debt Reduction Committee by Thanksgiving.  Their charge is to cut an additional $1.2 to $1.5 trillion over ten years on top of the $900 billion Congress agreed to in August.

BF.  Ag Committee Chairs are already negotiating with the Special Debt Reduction Committee to allow the Ag Committees to allocate the cuts over the programs under their jurisdiction.  So don't write-off the safety-net for commercial family farmers yet.  And don't forget that Agriculture already provided disproportionate savings this past year.  If all non defense discretionary spending were cut, we would still have a fiscal problem due to defense and social security.  If Congress does not accept the Special Committee recommendations by December 23, across the board cuts are to be imposed on defense, Medicare and other programs.  The decisions made by Christmas will only be a down-payment. The Bush II tax cuts are set to expire at the end of 2012, so if Congress does nothing else, tax rates will rise after the election.  Stay tuned to see what happens.
ME. Low ratings for Congress are from confrontational sound bites oversimplifying solutions. Already some predict the Special Committee will fail to come up with a plan that can pass.  The Federal Reserve is the only institution fulfilling its mission in managing the economy to prevent a double dip recession. Luther Tweeten-an economist of note who is usually for less government intervention--concludes our political institutions are hardwired for large deficits and institutional change is needed to get our debt under control.  He suggests a similar Federal Fiscal Policy Committee would be more effective in managing federal fiscal policy somewhat insulated from Congressional politics.  Variations of this model can be found in Brazil, Chile, Hungary, and Sweden.  Similar to the Federal Reserve Open Market Committee, Congress and the President could establish longer term appointments, authority and operating rules, and regular oversight to reduce instability and uncertainty in fiscal policy.

BF: Tweeten's idea would only fly if Congress continues to create more confrontation and uncertainty.  Historically, federal monetary and fiscal policies have provided stabilizing functions.  During a recession, the Federal Reserve loosens monetary policy to lower interest rates and stimulate business and consumer spending.  Congress loosens up fiscal policy by deficit spending as public assistance needs rise with layoffs and recessionary tax revenues decline.  But this time, federal spending rose to a record 25% of our economy as measured by Gross Domestic Product (GDP). If we look back to WWII, our taxes have averaged 18% of our GDP.

ME.  Our quick 2007-8 response avoided a global credit market melt-down that may have been a Great Depression.  We are still struggling with recovery in the aftermath.  Looking back to 1975 instead of WWII, federal spending averaged just over 21% of GDP while federal revenues averaged just over 19% of GDP.  But federal revenues have now fallen to 15% of GDP because of higher unemployment. So again I repeat: "Our economy was stronger in the 1990s with balanced budgets and higher taxes."

BF. The real question is whether the economy would recover more quickly if a combination of higher taxes on higher income brackets along with spending cuts were implemented compared to just imposing spending cuts alone?  Fed watchers suggest that if Congress implemented a balanced approach in balancing the budget, the Fed might be less compelled to follow its extra easy monetary policy as it attempts to avoid a double dip recession.  Buffett and Senator Simpson got it right.

* Professor of Economics at Iowa State University and Agricultural Economics Professor Emeritus at Kansas State University.


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