Monday, November 14, 2011

Should Deficit Hawks Favoring No Tax Hikes Be Paying Attention to Labor Strikes in Greece?

The economic question of whether the U.S. can close the trillion dollar annual deficit without tax increases is a subject of contentious debate. But I think an equally important question is whether it is politically feasible to try and close the deficit without tax increases. The perception of social injustice is already an issue that resonates with many independent voters. Just because main street Americans and the legions of unemployed are not camping with the aimless anarchists of the Occupy movement, it does not mean that their anger over the current state of the economy is not simmering. This anger is diffused somewhat because Democrats control the Presidency and the Senate. However, pushing through plans that cut entitlements without tax increases will stir up resentment that the average Americans is paying a heavy price at the expense of the "rich". Thus, although a spending reduction message plays well to the Republican base, it may alienate the independent voters needed to win elections and pass deficit cutting legislation.

Greece will be racked by another debilitating round of strikes this week. Their already weak economy will  slow even more and their budget deficit will grow even larger. Admittedly, a comparison between Greece and the U.S. is a bit like comparing apples to oranges. As ugly as is the U.S deficit problem, it is still solvable. The Greek debt crisis is likely only solvable via a default on their national debt. Their  economy is in a shambles, corruption is rampant, and there is tremendous nationalistic anger about austerity measures that are being forced upon them by outsiders from other Eurozone nations. However, it may not be totally far fetched to assume that some of the strikes and turmoil in Greece could spread to the U.S. A perception that senior citizens and blue collar workers are being "robbed" of entitlements could spark an ugly reaction. The aimlessness of the Occupy movement is one of its primary weaknesses. However, a deficit reduction plan that significantly reduces entitlements without any tax increases could ignite dramatically larger protests and ramp up property damage and violence.

The following is a summary of the "no new taxes" message. (via Senator Chuck Grassley's website). It offers the appeal of:  1) being easy to understand; and 2) being virtually painless for the 53% of households that pay incomes taxes. However, as you read this "no new taxes" message, ask yourself how this will play out with independent voters and the unemployed. Is it really a winning message?

Fiscal discipline and economic growth need to be the top priorities for deficit and debt reduction. Unchecked government spending will further threaten economic opportunity with higher debt and higher taxes. It’d be one thing if tax increases actually were used to reduce the deficit, but that’s not what happens. Since World War II, every new dollar in tax increases has resulted in Congress’ spending $1.17. Raising taxes has been a license for Congress to spend even more. And, every dollar spent by Congress is a dollar taken out of the economy, and higher taxes leave fewer resources for the private sector to make investments, expand production, and create sustainable jobs.

As I noted in a previous post, "back in the '90's, Canada proved that it is possible to get a huge budget deficit under control. Their solution is instructive. The Canadian ratio of budget cuts to increased taxes was 6 or 7 to 1. The Canadian experience provides support for a position that should be much more palatable to voters than a plan that exclusively targets spending cuts. Further, it has the added merit of actually having worked."

Thus, whether or not the strikes and labor unrest in Greece over budget cuts is applicable to the U.S., it should raise at least a bit of concern among those who support a balanced budget without tax increases. 

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