Compromise or capitulation

Everyone knows or should know that the large budget deficits and burgeoning debt in the United States is a big problem, many refer to it as a ticking time bomb.

A group of experts who spent two years on the problem and produced the report “Choosing the Nation’s Fiscal Future” have agreed to  some serious points on the deficit: A) it is unsustainable and will limit our flexibility the longer it is not seriously addressed and B) the size and scope of it is too large to solve simply through an increase in revenue or spending cuts. The cuts would be too deep and painful even for the most conservative and the tax increases too punitive for the most liberal.

The conclusions the debt commission appointed by President Obama offers a similar dire scenario if we do not address the problem. 

This brings us to the recent compromise between the White House and Congress over extending the Bush era tax cuts. As you know the President wanted to extend the tax cuts to everyone except those earning more than $250,000. The tax cut for the top tier earners has been estimated to cost $2 trillion over the next decade. Republicans stated on numerous occasions that they would fight letting those tax cuts expire, even allowing the tax cuts expire for everyone. The administration agreed to extend the cuts even for the wealthy in exchange for extending jobless benefits out to 99 weeks. This begs the question when does unemployment insurance stop and welfare begin. The extraordinary nature of the economic downturn justified extending these benefits, which has happened several times but can they go on indefinitely?  

While this may seem like a reasonable compromise to some, from a budgetary standpoint it is simply a capitulation as both sides agreed to spend more in order to retain a program dear to them. The compromise is estimated to add nearly $1 trillion to the deficit in the next two years.

If deficit reduction is the priority politicians’ claim it is, then the sacrifice offered should benefit that goal. If there was an appropriate compromise it would have been to let the tax cut expire for the top bracket and let unemployment benefits run out or find a way to pay for them by cutting something else. That was the discipline imparted on the system that allowed for a balanced budget less than a decade ago. And since that discipline was squandered in the name of tax cuts by the GOP, it is particularly disturbing hearing them spout off about the deficit without contributing to the solution. It is simple: if you add a spending program you need to cut something else or increase taxes; if you cut taxes, you have to eliminate some spending those revenue would have supported. The notion that tax cuts pay for themselves is a canard. If it were true, we woudn't be in this mess.

A story titled “The era of deficit denial is over” accompanied the President’s bipartisan fiscal commission report.

Less than a week later the tax compromise was struck proving that we are still in denial. A compromise would involve each side altering their position in a way that would reduce the deficit not each side agreeing to increase the deficit to save their own spending.

Apparently we will need another shock before we get serious. It may be coming shortly.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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