Of Deficits and Hurricanes

There’s nothing like a natural disaster to remind us of our (in)famous institutions that snap into action in providing disaster relief–especially in an election year. The blogosphere and web-pundits stormed in (pun intended) on each candidate’s record and positions on disaster relief and found the Romney/Ryan ticket having proposed 80% cuts in disaster relief funding. As online pundits argue over the pros and cons of such cuts, it touches upon one of the centerpieces of the election debate: Excessive spending and what to do about it.

The United States is in a deep hole, $1.1 trillion federal deficit and $16 trillion dollar national debt to be exact, and both president and nominee have different approaches as to how they will close that gap–supposedly (I will get to that later). During the debates President Obama talked about raising taxes for high income households and allowing certain business and household tax cuts to expire in order to close the gap. Mitt Romney’s plan is to cut taxes even further, adding $456 billion hole to the already enormous debt, but has claimed he will make up the lost revenue with “economic growth” and spending cuts. Unfortunately, the numbers don’t quite add up for Romney’s plan. As Bill Gale, from the independent Tax Policy Center, critiques Romney’s debt solution:

“Even if all the available tax expenditures were closed in the most progressive manner possible, it would not raise enough revenue among high-income households to offset the tax cuts they would receive. This was true even when we adjusted the revenue estimates to allow for the impact of potential economic growth, and even when we gave the campaign a trillion-dollar mulligan by ignoring the cost of the corporate tax cuts.

As a result, we concluded that if Romney did not impose new taxes on savings and investments, the only way to finance his tax cut proposals and reach revenue neutrality was to raise taxes on households with income below $200,000.”

This difference excites left-leaning pundits. Some so much so they’re calling it a “New”, New Deal. However, it may be a bit premature, if not totally off-base, to give Obama’s plan such a title. The fact remains, both are unwilling to cut the enormous defense budget and discussion of the bad American subsidy burden policy is non-existent (if you are to click on any one of my links, this is the one you should click on for sure). These two (especially the latter) causes a considerable amount of fiscal waste and only large corporations benefit from the industries these policies support. In fact, according to Lawrence Lessig, author of Republic, Lost, “10% of the recipients of farm subsidies collect 73% of the subsidies.” As a result, small-scale farmers can’t compete with large agriculture corporations because their bottom-line is leveraged far more than a competing small-scale farm. And yet, nobody talks about this.

I am not arguing that subsidies are all bad. Subsidies are an important tool for governments to support a nascent industrial sector so that it can grow and compete in the global market. For example, subsidies for green energy are an important piece of legislation that can help jumpstart a viable green industry sector. The problem becomes when to take the training wheels off. Subsidies artificially lower prices (as already noted in a previous link) and inhibits the free market to push-pull industrial sectors into other areas when they become less viable in one location and more viable in another. As a result, this creates a bubble and wastes an enormous amount of tax payer dollars, which increases the debt/deficit. It’s simply common sense that the oil/fossil fuel industry doesn’t really need subsidies to support their business because it’s already a proven commodity. Yet, we still pump $1 trillion in subsidies globally to get cheap gas and eliminate green energy competition.

At this point, it might seem clear that subsidies have to go, but here lies the conflict. Unfortunately, neither president nor nominee can simply slash subsidies completely tomorrow. There are many businesses, small to large, that are tied up in government subsidies and not allowing them time to transition their business models to seek revenue away from subsidies would cause a whole lot of people to lose their jobs and prices on food and fuel to skyrocket. In essence, it would be like implementing Iranian policies on the United States–not very smart.

The solution would be a long-term plan that must be designed to withstand successive presidents. It would have to be strategic in addressing concerns of rising costs that could be associated with subsidy cuts, which is usually addressed by lowering tariffs for cheaper imports. The money saved by subsidies can be reinvested in burgeoning sectors such as green technologies, high-tech services, and education to create a workforce that can support the demand for such positions.

Such a policy creates jobs, creates the workforce to perform those jobs, and saves the government a lot of money on waste. Cutting subsidy expenditures also allows proposals for tax cuts to actually be feasible by offseting the lost revenue caused by said tax cuts.

Unfortunately, that’s perhaps political suicide for both candidates as their campaigns rely on the contributions of those who benefit from subsidies. In other words, our tax dollars go to companies that pay candidates money to never address this problem. This hits on another issue of campaign finance reform, but that might be addressed in a different blog or you can read Lessig’s book (highly recommended).

In the meantime, we’re left with two politicians that blow harder than Sandy ever could.

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