want America to believe the economy is still lousy because government
is too big, and the way to revive the economy is to cut federal
spending. Today (Sunday) Republican Speaker John Boehner even refused to
rule out a government shut-down if Republicans don't get the spending
cuts they want.
Tomorrow (Monday) Obama pours gas on the
Republican flame by proposing a 2012 federal budget that cuts the
federal deficit by $1.1 trillion over 10 years. About $400 billion of
this will come from a five-year freeze on non-security discretionary
spending -- including all sorts of programs for poor and working-class
Americans, such as heating assistance to low-income people. Most of the
rest from additional spending cuts.
That means the Great Debate
that starts this week will be set by Republicans: Does Obama cut enough
spending? How much more will he have cut in order to appease
Republicans? If they don't get the spending cuts they want, will
Tea-Party Republicans demand a shut-down?
Framed this way, the
debate invites deficit hawks on both sides of the aisle to criticize
Democrats and Republicans alike for failing to take on Social Security
and Medicare entitlements. Expect Erskine Bowles and Alan Simpson,
co-chairs of Obama's deficit commission, to say the President needs to
do more. Expect Alice Rivlin and Paul Ryan, respectively former Clinton
hawk and current Republican budget hawk, to tout their plan for chopping
It's the wrong debate about the wrong thing at the wrong time.
official Washington it seems like the 1995 playbook all over again,
when Bill Clinton and Newt Gingrich played a game of chicken over
cutting the budget deficit, the hawks warned about the perils of giant
deficits, and the 1996 general election loomed over all of it.
Washington politicians and the media know this playbook, so it's natural
for them to take on the same roles, make the same arguments, and build
up to the same showdown over a government shutdown and a climactic
But the 1995 playbook is irrelevant. In
1995 the economy was roaring back to life. The recession of 1991 had
been caused (as are most recessions) by the Fed raising interest rates
too high to ward off inflation. So reversing course was relatively
simple. Alan Greenspan and the Fed cut interest rates.
2011 and most Americans are still in the throes of the Great Recession,
which was caused by the bursting of a giant debt bubble. The Fed can't
reverse course by cutting interest rates; rates have been near zero for
Big American companies are sitting on almost $2
trillion of cash because there aren't enough customers to buy additional
goods and services. The only people with money are the richest 10
percent whose stock portfolios have been roaring back to life, but their
spending isn't enough to spur much additional hiring.
Republican bromide -- cut federal spending -- is precisely the wrong
response to this ongoing crisis, which is more analogous to the Great
Depression than to any recent recession. Herbert Hoover responded the
same way between 1929 and 1932. Insufficient spending only deepened the
The best way to revive the economy is not to
cut the federal deficit right now. It's to put more money into the
pockets of average working families. Not until they start spending again
big time will companies begin to hire again big time.
the government services they rely on -- help with college loans for
their kids, help affording home heating oil, and the rest. State and
local budget cuts are already causing enough pain.
direct way to get more money into their pockets is to expand the Earned
Income Tax Credit (a wage subsidy) all the way up through people earning
$50,000, and reduce their income taxes to zero. Taxes on incomes
between $50,000 and $90,000 should be cut to 10 percent; between $90,000
and $150,000 to 20 percent; between $150,000 and $250,000 to 30
And exempt the first $20,000 of income from payroll taxes.
up the revenues by increasing taxes on incomes between $250,000 to
$500,000 to 40 percent; between $500,000 and $5 million, to 50 percent;
between $5 million and $15 million, to 60 percent; and anything over $15
million, to 70 percent.
And raise the ceiling on the portion of income subject to payroll taxes to $500,000.