Thoughts on the Washington budget battle


CLARKONOMICS: We just went through this game of brinkmanship in Washington with the Republicans in the House and the Democrats in the Senate (represented by John Boehner and Harry Reid, respectively) sitting down with President Obama and mulling a possible shut down if the budget wasn’t cut.

First, let me say that I’m happy the conversation in Washington is all about reducing spending, not about new initiatives to spend money. (Our federal spending is already roughly a quarter of the output of our goods and services in the United States. It should, however, be closer to one-fifth for a capitalist economy like ours to stay strong.)

But we’re fighting about the wrong thing. We can’t continue down this path where we spend money we don’t have. And the real problem is Medicare, Medicaid and Social Security and the promises we made for benefits that can’t be kept because we don’t have the money.

My sister recently became Medicare eligible. Over her lifetime, she paid in a tiny fraction of what she’ll drain out during the rest of her life. It’s a reverse Ponzi that’s not sustainable unless we want to diminish our position in the world.

As far as I see it, there are 3 paths we can follow here:

  1. We can keep spending on the benefits we’ve promised and get to the point where we’re not able to pay back our debt obligations.
  2. We can keep spending on the benefits we’ve promised and increase taxes dramatically to foot the bill. (But taxing the rich alone won’t be enough.)
  3. We can change the benefits we’ve promised, hold down tax rates and put more responsibility for providing health care and retirement back on the individual.

For the country’s sake, my bias is for the third option. I believe we need to make a different promise of benefits and in return not raise taxes by huge amounts. But if the political will of the country is the opposite  — opting to maintain the current level of benefits and raise taxes — that’s far preferable to option No. 1 (keeping the benefits the same but not coming up with more money to cover the spending.)

We need to have a real serious conversation in the country where people know that we can’t still spend as we do and tax as we do because that will put us on a path to no longer being the most successful and powerful nation on Earth. If we do continue down that road, we will plant the seeds of being an “also ran.” I don’t want us to be an “also ran” on the world stage, and I know you don’t either.

In the end, it requires we face up to the responsibility and either change what we promise or change what we tax.  

  • Show Comments Hide Comments