A very brief outbreak of irrational optimism

|
Opinion Zone,James A. Bacon

It's a new year, a new Congress and a newly chastened president. What can we expect in the year ahead for the most important issue of our time: bringing federal deficits and the national debt under control?

I have been dour and pessimistic about the prospects for balancing the budget for several years now. Yet, for the first time, despite the tax-and-budget deal struck in the dying days of the Pelosi-Reid Congress, I see tantalizing glimmers of hope. As I have argued repeatedly, Americans have a window of opportunity of four or five years before we enter the "event horizon" of the black hole we call the national debt. At that point, when interest payments on the debt mount faster than we can possibly hope to cut the budget, there is no return. But maybe, just maybe, we can avoid that fate.

There are many reasons for pessimism, but I won't rehash them here. Just go back and read the last 200 posts on my "Boomergddon" blog. Here are some reasons to think we just may pull things out:

Republicans control the purse strings in Congress. The new leadership of the House of Representatives has vowed to roll back discretionary domestic spending by $100 billion to pre-TARP, pre-Stimulus levels. That will close only one-tenth of the $1 trillion-a-year budget gap that needs addressing, but it's a start. We have to be realistic: There is only so much domestic spending that can be cut while Democrats still control the Senate, the presidency and... the mainstream media. Cutting spending by $100 billion a year is progress of a sort.

The impetus for tax reform is building. The U.S. tax code is an abomination and the "solutions" proffered by the Pelosi-Reid wing of the Democratic Party -- repealing the Bush tax-rate cuts -- would have made things worse. The problem is that tax rates are too high, punishing industry and thrift and driving capital into less-productive tax shelters, while the code is also riddled with $1 trillion in exemptions, deductions, credits and other loopholes. The higher rates go, the more pressure there is for special interest groups to seek carve-outs for themselves. Thus, the tax system is neither fair nor efficient.

Erskine Bowles and Alan Simpson, the co-chairs of the Obama deficit commission, made a powerful argument for tax simplification. Eliminating the loopholes would broaden the tax base, making it possible to both bring down tax rates (thus stimulating economic activity) and bringing in more tax revenues (thus reducing the deficit). The idea has appeal across the ideological spectrum. Further, President Obama has endorsed the idea of closing corporate tax loopholes in exchange for lower corporate tax rates, an intellectual breakthrough for him. Republicans are still hung up on the idea that eliminating a special-interest loophole is the moral equivalent to a tax hike, which their hero Ronald Reagan knew it clearly is not. If the GOP can get past that mental tic, it may be possible to enact tax reform that could close the budget gap by a couple hundred billion dollars more.

The economy is recovering. Economic activity slowed last year as business pulled back into its turtle shell, terrified of what punishing new laws, regulations and edicts would emanate from Congress and the Obama administration. A GOP-controlled House will put a lid on new job-killing initiatives and even may roll back some of the excesses associated with Obamacare. There are signs that business, which has piled up immense hoards of cash, will start investing again. Stronger economic growth could bring in unexpected revenue.

Trimming spending, reforming the tax code and stronger-than-expected economic growth is the most we can realistically expect from the next two years of divided government. And even if all three possibilities pan out as I hope, the job of restoring integrity to the budget will have advanced maybe 20 or 30 yards down the ballfield -- with another 70 to 80 yards to go. Still, any progress we make in the next two years will make it easier to finish the job in 2013, if and when fiscal conservatives can take control of the Senate and the presidency.

Don't make too much of this brief effusion of optimism. Given the perversity of human nature and the depravity of Congress, it is entirely possible that none of these things will come true. In fact, I'm feeling remorse for even engaging in such wishful thinking. But without hope, we have no reason to struggle onward. So, let us enjoy the moment.

View article comments Leave a comment