Article: 2011 Budget Compromise Threatens Recovery, Doesn't Address Real Causes of Deficit

A Three-Phase Strategy for Reducing Deficits and Promoting Economic Growth

In the context of the above discussion on the components of the deficit, the strategy and measures undertaken for coming out of our current predicament should be prioritized and executed in three phases as follows.

The first priority should be to safeguard the recovery, accelerate the pace of economic growth and focus on job creation. This phase should last for possibly two or three years (2011-2013) till the economy picks up steam and the unemployment drops to 7% or less. No cuts in discretionary spending should be enacted, instead, government operations should be streamlined and duplication, waste and fraud eliminated. On the contrary pro-growth investments in education, innovation and infrastructure should be undertaken, as Obama outlined in his State Of The Union address of Jan 26, 2011.

Second, the short-term deficit should be tackled during the same 2 to 3 year period by ending the two ongoing wars, reducing significantly defense spending, letting the Bush tax cuts expire, and reforming the corporate tax code -- by closing loopholes, eliminating unnecessary and excessive credits and subsidies, and providing incentives for capital repatriation and disincentives for off-shoring jobs -- while lowering corporate tax rates. Most of these measures should be enacted gradually as the economy recovers and they do not require cuts in discretionary spending, the generated revenue will enable gradual reduction and elimination of the short-term deficit and debt. Moreover, as the Health Care Reform law gets implemented, its provisions should be strengthened to further control health delivery costs; to this end a public option may have to be added to the pool of available health plans to provide additional competition.

Third, short after the two sets of policies outlined above have been enacted and as they are taking effect, serious long-term reform of our safety net programs must be undertaken. This should use some suggestions from the President's Deficit Commission, but also reject the premise of $3 in spending and program cuts for each $1 in raising tax revenue that it espouses. A mix of diverse measures should be jointly enacted that includes: reforming the Tax Code for individuals (through raising tax rates for top earners and their estates, removing some deductions, and raising the tax on dividends and capital gains), further cuts in defense spending, some cuts in non-security discretionary spending, and reforms which enable Medicare, Medicaid and Social Security's solvency in the long term but are also equitable and do not hurt those needing the benefits most. By contrast the proposal by Rep Ryan (R-WI) for $6.2 trillion (over 10 years) is definitely a non-starter, since it replaces Medicare by vouchers covering only portion of health costs, replaces Medicaid by block grants to the ailing States, and offers additional tax cuts for the wealthy and the corporations, while it cuts programs for the middle class and the poor.

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