Originally Published: December 11, 2012 10:51 p.m.
The "fiscal cliff": Policy suggestions. I won't get into the strategy of negotiations, except to note that last time Obama did try to compromise about 90 percent of the way and still didn't get agreement. Republicans should have taken what was offered then. I'm also not basing policy suggestions on what's politically achievable, just what I think we should do. These are offered mostly without explanation. For that see my previous columns and reference links online with this column.
Short term, we need to get the economy going and address unemployment. Long term, we need to get the debt ratio under control.
The idea of little or no actual paying down of debt, but rather getting the economy to grow faster and debt to grow slower, is the target in the plan from Simpson-Bowles (the closest thing to an official plan), the Rivlin-Domenici plan, and plans from think tanks ranging from liberal to conservative. There's a chart showing how some of them play out. In how quickly the graph line turns down, and how far, all are in the same ballpark. The difference is how harsh they are on people.
The Simpson-Bowles plan states emphasis is needed on infrastructure and growth. The Heritage Institute gets there but by harsh cuts. The Economic Policy Institute and Center for American Progress gets there with less cuts and more emphasis on growth. That's easier on people and yields a better economy in the long run.
We are in dire need of infrastructure work. Right now we can lock in borrowing at or near zero interest for 10 to 30 years. We should link that to the interest rate; when it starts to go up, we stop borrowing for things like infrastructure. Increasing the money supply is a normal part of a growing economy, which should likewise be linked to the numbers. When there are early signs of systemic inflation, cut back.
Infrastructure work is a mid- to long-term project, but very profitable. The Federal Reserve projects that for $1 spent on infrastructure the economy will grow by $2. We also need more short-term help. Jobs would be better than extending unemployment insurance but the CBO says it's one of the fastest and most cost effective things to do for the economy. Again, that should be just until economic growth is a little more stable.
Taxes need to be more progressive overall. Whether taxes on the high end go up now or later probably isn't crucial; eventually though it is. Taxes on the middle will need to go up, but linked to when the economy is doing better.
The Federal Reserve has also discussed "linking to the numbers," continuing to increase the money supply until inflation and unemployment numbers indicate otherwise.
Both Medicare and Social Security could very gradually become means-tested, helping only those who need it. By that we could help those in need more, and have less tax burden on current workers. On the other hand we'll probably eventually have something like Medicare for all. Social Security, as is, only needs an increase in the payroll-withholding ceiling to be fine.
Tax breaks need to be reviewed, closing loopholes that result in little or no tax from people doing well or profitable corporations. The mortgage interest deduction could be limited to helping people who otherwise would have to rent. The charity deduction ought to remain as is. Converting many deductions into credits (another link) would bring in more revenue, and progressively.
Capital gains ought to be taxed like any other income. It's a fairness issue. It is not nearly the "double taxation" problem it's made out to be (another link) and, besides, lots of income gets double taxed if you follow it.
The biggest single issue is the cost of healthcare. Cutting Medicare/Medicaid for people who need them simply shifts costs. It has to be dealt with as a national economic problem, not a government budget problem. Obamacare is a good start. Other countries show it can be done.
Deficit spending? The bulk of it is the growth of Medicare, wars and defense, and the crash. The crash lowered tax revenue, added bailouts, required stimulus, and increased demand for the safety net. Some of that is past and the rest is reason to get the economy going. In deficit negotiations last year we already cut 70 percent of what Simpson-Bowles calls for. As we recover, if we are smart about defense and reign in national health costs, we'll be fine. There is always waste, but identifying it needs to be a constant and relentless combing through every agency all the time. Periodic meat cleaver approaches are counterproductive.
Add more revenue sharing from D.C. to the states until the economy recovers more, restore estate taxes on large estates, eliminate the forgiveness of capital gains taxes at death, and add a small financial transaction tax.
Other than taming healthcare costs, this is not hard to figure out, and none of these steps need to be huge. So let's just do it.