Deficits and Existing Fiscal Policy

America has run budget deficits throughout its history, mostly during war times.  However, during the Reagan presidency the country began to run large deficits during peace time.  While Reagan probably wanted a balanced budget, he wasn't able to get it when Congress passed his large tax cuts but not his propositions for spending cuts.  This pattern would repeat itself over and over again.  Both parties are to blame for our current budget situation.

How many times do you hear about tax cuts from politicians?  The correct answer is all the time.  So many tax cuts....yikes...

How many times have you heard about spending cuts?  Lots.

How many times have you heard about specific spending cuts? Almost never.  They are very unpopular.  If you cut something, a few people get hurt a lot and raise a lot of ruckus, many people benefit a little and don't seem to notice.  This is not a recipe for good budget discipline.

So....we've been down this road a lot of times, what are the Republicans and Democrats doing about it?

Republicans continue to push tax cuts?  Someone should tell them that tax cuts make the debt grow larger, not smaller.  "Intellectual" Republicans will speak of the "Laffer curve" and say that lower rates will encourage higher revenues.  This is simply not true, the only taxes that fit under this description is the cigarette tax.  Enhanced "intellectual" Republicans will say that lower rates will foster economic growth and then increase tax revenues.  That argument is not too great.  First off, it hasn't happened.  Second of all, people don't make business investments based on 2-3% tax differences.  I am a former business owner and it didn't make a difference if my tax rate on income was 0% or 15%.  I was going to make the investment if it made a profit or not.  Republicans are also against anything that would increase tax rates...that's really helpful...not.

Democrats want to tax the rich.  That will help.  Democrats also want to cut taxes for everyone else and increase social spending.  That won't help. 

We're doomed!!!!!!

This issue seems a lot like the situation that Paul Volcher, the chairman of the Federal Reserve, faced in the late 70s and early 80s.  The country was facing high inflation and a stagnant economy.  People assuming inflation was here to stay.  Volcher, caught between a rock and a bunch of cement, was either going let inflation run free or create a recession by increasing interest rates.  [For those who don't know a lot about macroeconomics, you raise increase interest rates to curb inflation and decrease interest rates to stimulate the economy.]  Volcher increased interest rates to defeat inflation.  Since inflation was a lagging figure, Volcher received a lot of flak for single-handedly putting the country through a recession while inflation was still high.  Volcher's conduct paid off big time when inflation was under control and this country got back on track.

We need a new Paul Volcher for the budget deficit.  The problem is that Volcher was an appointed person, not one directly elected.

We're doomed!!!!!!