April 17, 2011


Reason for optimism on U.S. economy: Tough times call for tough action - and political courage - from policymakers. We've been there. (Mark Zandi , 4/16/11, Philadelphia Inquirer)

The good news is that a political consensus is forming between the rational right and rational left. Two bipartisan commissions have now concluded that both spending cuts and tax increases are necessary, and that the biggest part of deficit reduction should come from less spending. Historical experience suggests that countries that tackle their fiscal problems by spending less see their economies perform better in the long run.

Besides freezing discretionary spending, Congress must put entitlement programs on solid financial ground, permanently. Indexing the Social Security retirement age to longevity, means-testing benefits, and tying them more accurately to inflation are all ways to do this. The changes should not affect those nearing retirement, who counted on the current system in their planning. But younger workers have decades to make the necessary adjustments.

Tax reform, meanwhile, should focus on reducing tax expenditures - those exclusions, exemptions, deductions, and credits that currently cost the federal government close to $1.2 trillion per year. The mortgage-interest deduction is among the largest of these, but hundreds of other loopholes indirectly pay for tuition, health insurance, child care, local property taxes, and so on. From an economic perspective, there is no difference between eliminating tax loopholes and cutting government spending; the result is the same.

Limiting tax expenditures could raise enough revenue to allow lower marginal tax rates for individuals and corporations. This might help end the decade-old political war over tax rates for those making more than $250,000 a year. It would also make U.S. firms more globally competitive and likely to invest and hire at home.

I'm not saying any of this will be easy; policymakers will almost surely need a push from markets. Interest rates are still low, suggesting the global investors who buy U.S. government debt don't mind our fiscal mess. But their patience stems largely from the lack of alternatives.

....the entitlement fixes are so easy there's no pressure for genuine reform.

Posted by at April 17, 2011 7:25 AM

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