It's the Politics, stupid

It’s difficult to not get lost in the numbers in the debate over how to fix our budget deficit and increase the debt ceiling. Just how much should the government cut in future spending? Obama has recently been pushing hard for over $4 trillion. Several members of Congress believe $2 trillion is probably more realistic. Besides spending cuts, how much (if any) revenues should be raised from tax hikes? Earlier this year, Republicans published a report stating that an 85% / 15% split between spending cuts and tax hikes was the average for successful fiscal consolidation. Currently on the table? An 83% / 17% split - which doesn’t seem too far off. America’s tax take hasn’t been this low in decades. Even Ronald Reagan raised taxes when the time came.

In about 3 weeks, if the debt ceiling has not been raised, the U.S. WILL go into default and the government WILL stop making a lot of its traditional payments (beware: pensioners, soldiers, government suppliers). Jobs will be lost and a fragile economy will find it on the brink of another meltdown. Unemployment recently rose from 9.1% to 9.2%, and more job losses would be tough to swallow. And the saddest part about this situation is that there is really no economic reason for this to happen. America’s current indebtedness IS affordable. Even through the recent recovery, investors have been more than willing to lend to the federal government. The problems with the budget deficit and debt ceiling are simply political. Republicans have held hostage an increase in the debt ceiling through uncharacteristically obstinate negotiating tactics. The GOP has snubbed any mention of tax hikes. They have even shot down the simple elimination of tax loopholes. The unwillingness of a few in Congress could have a ghastly disproportionate effect on the world’s financial health.