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Congress is at a stalemate, with the American tax payer caught in the cross hairs. Right now congress is playing a game of chicken. Republicans refuse to raise more revenue via taxes to pay our debts, while Democrats refuse to cut social service/entitlement spending and would prefer to tax the rich.
The Risk of Doing Nothing
If the government goes into technical default on the $14.3 trillion dollar debt. interest payments on government T-Bills and other forms of debt are delayed until the government pays. While there would be little doubt that the government would pay, any delay would create some doubt, which could cause bond holders to sell at a discount. For example, if China decides to sell U.S. bonds our of fear of non-payment, the price of bonds decline, including those held by U.S. Taxpayers.
Like the failure of Lehman brothers, who knows how much U.S. government debt is held by banks around the world? Banks that hold our debt or businesses that have collateralized loans with this debt would then have to write down the value of these assets. Since collateral levels are not being met, all would have to provide more collateral if they have it. If they can't, the loans are called. As loans are called, businesses can no longer function and fail, reducing employment and the downward cycle begins. Throw in fragile economies such as Greece and Italy, and the world quickly falls into recession or some type of depression.
So what do we do. Failure to act is not an option, as raising the debt ceiling will just lead to bigger deficits, higher interest payments and a problem that is even harder to solve.
The Plan for a Fair and Balanced Budget
Maybe I'm a bit naive, but perhaps the answer is to both raise revenue and reduce spending. While that is stating the obvious, the question is how. Let's also say that the complexity of both are politically charged and fairly impossible to accomplished (as demonstrated by the current impasse). With layers of subsidies, tax loopholes and social entitlement programs all developed over years of negotiations in congress, it is naive to think that any one type of spending can be cut without a fight.
So there is only one short term conclusion. Do what American's are known to do, own the problem. There is no other choice then to share the burden equally, across tax payers and those that benefit from government spending.
The Simple Plan:
1. To avoid instability, all cuts and revenue increases will be phased in over 5 to 10 years.
2. 50% of the budget gap will be closed with spending cuts, and 50% through increases in revenue.
3. All cuts and revenue raising activities will be implemented in proportion to current levels of spending or revenue/taxation.
In terms of cuts, if defense is 25% of the total U.S. budget, then defense should undergo a cut of 12.5%, representing its fair share of the cuts (25% of 50%), to be phased in over 5 to 10 years. Subsidies for farming, education etc will all be cut in the fair share percentage.
Taxpayers will have to shoulder the same, with tax increases applied based on current tax rates. Yes this will impact the poor and rich, but fair is fair.
Beyond these levels, congress can fight it out after the fair budget plan is put into place. We got ourselves into this mess, and as American's we all own the debt, Democrats and Republicans alike. And like any debt, we need to pay for it. Not through magic, not through disproportionately harming the poor, or the subsidized, but through a plan where the burden is shared by all.
Jeff,
I like your idea very much. I think the key stumbling block is that the current administration has always held to the premise that income should be redistributed from the wealthy to the less wealthy.
The concept of fairshare does not enter into the equation. The fact that a common sense approach cannot be reached is more about the stubborn attitudes of the leadership on both sides of the aisle, and the fact that both sides want to say they won.
Rhonda Drake
Posted by: Rhonda Drake | July 13, 2011 at 05:20 PM
I agree with what you are saying. The only reason I proposed this type of idea is that this isn't an isolated piece of legislation, it's playing with the stability of the world economy. Given the stakes, it's time for a grand compromise instead of a principled stand that results in disaster.
Posted by: Jeff Grill | July 13, 2011 at 08:23 PM