Reagan Tonic Might Make Difference

“Simply put, the federal government is broke,” Mississippi Congressman Gregg Harper said recently. He echoed his mentor, Speaker of the House John Boehner, who said “We’re broke; broke going on bankrupt.”

Sounds terrible. But is it accurate? Well, not exactly.

Greece is about “broke.” Its bonds are “junk” and sell at high interest rates. U.S. bonds still rate AAA and sell at historically low rates. Hard-hearted financial markets don’t think we’re broke.

Boehner’s spokesman explained what his boss meant. Michael Steele said, “If an American family is spending more money than they’re making year after year after year, they’re broke.”

Well, overspending doesn’t make an American family “broke” until it uses up all its assets, can’t borrow, and can’t pay bills. Until then, the overspending family, like the U.S. government, is just “going broke.”

To keep from going broke, Boehner and Harper say we need quick, painful spending cuts. “There is no question that many of the spending reductions contained in these Continuing Resolutions will be painful,” Harper said.

He’s talking about $50 billion in cuts House Republicans are demanding in mostly Democrat-favored social programs between now and September. These cuts are more symbolic than substantial amounting to a smidgen of “non-defense discretionary spending,” which in total accounts for just 19% of all spending. The meat and potatoes of the budget are “mandatory spending” – Social Security, Medicare, etc. (55%) – and “defense discretionary spending” (20%). Interest costs make up the rest.

In 2010, spending totaled $3.5 trillion with a deficit of over $1.2 trillion. To quickly balance the budget, every spending sector would have to be cut 33%. But even House Republicans don’t talk openly about big cuts to Social Security or defense.

Also seldom mentioned by House Republicans is the “revenue” side of the budget. Today, federal tax revenue at 14.4% of GDP is the lowest since 1950. The 40-year average is 18%. Returning tax receipts to this average would wipe out about one-third of the deficit.

Ronald Reagan did it. The godfather of tax cuts slammed shut tax loopholes, generating tax receipts to offset his cuts. Reagan lieutenant David Stockman talked uncommonly straight about that recently:

“We did have a big reform in 1986 and a lot of the loopholes were closed. That made for a better tax system. But now, here we are 25 years later and all of the loopholes have cropped up again and re-insinuated themselves into the tax code. So, we’re going to have to have another house cleaning.”

A little Reagan tonic – closing tax loopholes plus meat and potatoes spending cuts – might show House Republicans prefer solutions to confrontational demands. Might bring the balking Senate along. Might make a real difference, like Reagan did.

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