Thursday, July 14, 2011
There are a lot of pieces to the debt-ceiling deal. There are the taxes upon taxes, as The Wall Street Journal editors describe it. That's the roughly $1 trillion in new Obama taxes on top of what he's already signed into law. It's an economy and jobs killer.
Then there's the entitlement piece, which may be more interesting since Obama is apparently open to extending the Social Security and Medicare retirement age and using the so-called chained-Consumer Price Index, which would lower cost-of-living adjustments (and increase income-tax thresholds). Whether the president is serious about these entitlement measures, no one knows. It's noteworthy that he's at least talking about them, although he's linking them to higher taxes.
But there's another piece to the debt-ceiling deal that hasn't yet seen the light of day. It's the non-entitlement spending piece. That is, domestic and defense discretionary spending plus so-called small entitlements like food stamps, unemployment benefits and so forth.
Here's my thought: The public wants deep spending cuts. That's their first priority, and that's why polls overwhelmingly show opposition to a debt-ceiling increase. So regarding those spending cuts, the only thing that matters is the first-year spending decline. That would be 2012. If the spending baseline is brought down significantly in year one, then the out-years will follow suit. The government's cost curve will ease down.
For example, go back to the Paul Ryan budget. Ryan includes a $110 billion reduction from the Congressional Budget Office baseline for fiscal year 2012, which reflects a $179 billion cut from the president's budget baseline. Over 10 years, that's roughly $6 trillion in savings. That would be real money. It would be significant. In fact, Ryan's total budget in 2012 would actually come in about $100 billion below 2011. That's incredible. It's almost always that so-called spending cuts are mere reductions in growth. Hats off to Ryan.
But even so, his 10-year budget would still rise by about $40 trillion.
So, again, 2012 is the only year that really counts for spending cuts in the debt deal. My guess is that any entitlement reduction will take decades. So if Speaker Boehner sticks to his argument that there must be more than $1 worth of spending cuts to offset a $1 increase in the debt ceiling, then 2012 must be his target year.
As the congressional negotiators haggle with President Obama, we the taxpaying public have no idea what they're cooking up on 2012 spending. It could be a worthwhile reduction or not. Out-year discretionary decreases and small entitlement cuts for 2019 to 2021 are simply not reliable or credible. Congresses change. Deals are broken. Outcomes are, well, kind of like a scam.
And the public is onto this. The highly accurate IBD/TIPP pollsters have just released an incredible result. Get this: The public rejects a debt-ceiling increase by a huge 58 percent to 36 percent. That includes 59 percent of independents and even 38 percent of Democrats. That is the tea party revolt.
I believe the public agrees with people like Michele Bachmann. She told me in an interview this week that Congress can direct the Treasury to "first pay off the interest on the debt, make sure our military men and women get paid, and then deal with our priorities. Yes, we have very sacrificial consequences, but when are we going to get serious about deficit reduction?"
On this logic, Bachmann and other tea party Republicans -- including most on the presidential campaign trail -- oppose a debt-ceiling increase. This populist spending revolt runs directly counter to the Tim Geithner, Wall Street, big-business view that we must at all costs have a debt-ceiling increase to make good on our federal debt.
Tea party populists are saying no, no: We can still make good on our debt, but this debt bill is the only leverage we have to force Washington to cut spending.
Main Street is in revolt against Wall Street, although it should be noted that Wall Street bond investors are not panicked by any means. The 10-year Treasury continues to trade below 3 percent. Maybe that will change by Aug. 2, or the next Geithner debt-limit drop-dead date. But right now the bond market seems to be aligned with the tea party.
President Obama says it's time to "eat our peas," meaning the debt deal should have huge tax increases. That argument is being rejected. Instead, the grassroots sees a big bowl of porridge and wants to shrink that bowl substantially -- no matter what the "sacrificial consequences."
I'm with the porridge.
Larry Kudlow, National Review Online's Economics Editor, is host of CNBC's "The Kudlow Report" and author of the daily web blog Kudlow's Money Politic$.
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