Understanding the Budget/Deficit Fiasco…

On one hand, I am glad that Washington DC is finally (!) talking about the unsustainable borrowing and spending habits of the United States. It had to happen sooner or later; better now than never.

On the other hand, the tenor and substance of the dialog and proposals reveal just how far up the creek we really are and just how hopeless it really is to plan on something sensible emerging. After trying to make sense of the various proposals I think I can summarize them all with a single phrase: You’d better be ready. We’ll get into the ‘for what?’ down below.

The most aggressive of the proposals seeks to reduce the overall deficit by an impressive-sounding $4 trillion over the next ten years. Of course, this merely trims $400 billion each year, which only reduces the deficit to something close to a trillion dollars a year, or double what it was at the beginning of the crisis.

A trillion a year is still far too much to carry, and the message has not been lost on gold, which is now performing the Dance of the Big Round Number at the $1,600 mark.

Unfortunately none of the proposals comes with enough detail to make any definitive statements or perform any meaningful analysis. I suppose they are still too fluid for release, but it would be nice to have something to go on.

For example, here’s all I can find out about the so-called “Gang of Six” plan.  It would:

• Reduce deficits immediately by $500 billion through a combination of cuts, principally to entitlements
• Cut entitlements by switching to the chained CPI, which will reduce the COLA increases, possibly to zero in some years
• Cut the top tax rate to 29% from 35%
• Establish a single corporate rate
• Eliminate the alternative minimum tax (AMT)
• Raise $1 trillion in new revenue over the next ten years by reducing tax breaks

That’s all the detail we have. Where the $500 billion in immediate deficit reduction would come from and how cutting tax rates and eliminating some tax breaks would end up increasing revenue by $1 trillion over ten years remain thoroughly unexplained.