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James Pethokoukis on Tackling US Debt

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James Pethokoukis writes at his blog that the current sovereign debt crisis in Europe should provide Americans with an opportunity to reflect on how to deal with their own mounting debt.  In short, Pethokoukis’ argument boils down to four points:

1) Cutting spending and raising taxes is a risky formula. It doesn’t have a great track record;

2) Trying to take more from rich people has its limits. Higher and higher income taxes or even wealth taxes create incentive to find tax havens and avoid productive work or capital allocation;

3) Cutting spending is better than raising taxes;

4) Less spending +more growth.

He provides data to back up each point and links to a larger article he recently wrote for The Weekly Standard.

Pethokoukis makes some excellent points and I am largely in agreement (although he brings to bear some strawmen in the longer piece), particularly on the need for economic growth, rather than broad tax increases, to increase revenues to service the budget.  What struck me, though, was that he never really addresses the friction that makes any trimming of spending, particularly around entitlements, difficult if not impossible–Politics.

Cutting spending comes down to politics–nothing more. I am not sure to what extent we have the political environment in the US to implement the kind of cuts that Pethokoukis, and others such as Rep. Paul Ryan, suggest.

Certainly the overall mood in the electorate supports dealing with the deficit and spending, but when polled on individual entitlements and government programs that consensus and support quickly evaporates. This means that even if Congressional leaders and the President may want to implement a plan to cut spending the overall initiative could easily be scuttled by individual politicians protecting their electoral chances with constituents by voting against or killing specific cost-reduction measures.

Unless someone is forcing the US to cut spending as is the case in Greece–and, therefore, providing political cover for individual politicians–it is hard to imagine progress on this front in the near term.


Tagged: political economy, political risk, sovereign debt

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