Debt Deal as Salami Strategy

by Chidem Kurdas

Yes, a federal debt deadline is looming and, yes, it has become conventional wisdom that something needs to be done about the deficit and resulting debt. Having watched the  political jockeying, I am now persuaded that the notion of a bi-partisan deal to tackle the deficit is likely a trap.

To raise the debt ceiling, President Obama urges Republicans to accept a bargain that includes higher taxes and spending cuts. Note the reasoning: “The money’s been spent,” he reportedly said. “So this is urgent, and it needs to get settled.”  

Suppose Republicans agree to ending some tax breaks as Mr. Obama proposes. Next time around, he comes back with another oh dear, we already spent the money, you’ll have to raise some other taxes and, of course, the debt ceiling again. And so on and so forth, with Leviathan in the main protecting its ample bulk.

As for the proposed spending cuts, the overall level of government spending is so high that it will remain at record levels after the cuts. And the more tax revenue is raised, the more can be spent.

No surprise, the particular tax breaks Mr. Obama wants to end are the least defensible politically, benefitting the rich and oil and gas companies. But it’s a salami strategy. First start with a slice of tax hikes on the wealthy.  That sets the precedent. Next time, take another slice, from the wealthy who did not get hit the first time. Then another slice, from part of the middle class. Before you know it, Leviathan is munching on a substantially larger portion of the salami.

It’s better to think about deficits in terms of Herbert Stein’s Law, named for an unusually witty Council of Economic Advisers chairman who died in 1999.  If something cannot go on forever, it will stop, Stein pointed out. The growth trend in government programs and spending can’t continue, so it won’t. By providing additional tax revenue, you’d be feeding it.

Mr. Obama complains that the Republicans are dragging their feet on extending the government’s borrowing authority. That’s like saying a spendthrift needs more money, so why are you slow in providing him with loans? This is the logic that propels credit bubbles as well as government deficits. The debt ceiling is there for a reason. Congress and the president are supposed to stay within it. The strategy of spending the money and demanding more should not be encouraged.

True, as the economy recovers tax revenues will automatically increase and deficits may look less troublesome. But there is a long-term structural deficit that goes beyond the business cycle. The less it’s fed, the sooner it will end.

9 thoughts on “Debt Deal as Salami Strategy

  1. Larry Lindsey had an op ed in the WSJ this past week on why the deficit is really much higher than the reported numbers. The main problem is the debt servicing costs when interest rates return to normal.

    If Obama got all his taxes, over 10 years they would pay only for one year’s increase in the deficit under Larry’s calculations.

    Only truly masive spending cuts can end the deficits.

  2. “Salami strategy” suggests a level of rationality beyond what we may be witnessing. It’s hard to imagine anybody with an IQ over 85 who can’t understand we are careening toward a cliff. At this point, the pols resemble nothing so much as a crew of blithering drunks popping open the next bottle of whiskey while bickering over who’s to blame for the binge. One of the most idiotic rhetorical lines is that reluctance to raise the debt ceiling must undermine confidence in the government’s ability to meets its debt obligations. In a sane world, what undermines confidence is going deeper into debt to meet current expenses. What restores confidence is to stop the borrowing and live within your means.

  3. Jerry O’Driscoll-
    Good point. I think this round is just an opening ceremony in the process. All the proposals are opening statements, I think.

    However, conditions will change. Economic recovery will no doubt increase tax revenues–as I noted in the post.

  4. Allan Walstad-
    The rationality question is always interesting. I expect an official Presidential speech, like the one Obama gave on the debt deadline, aims to mold public opinion in a certain way. It is rational in the sense that it is a deliberate exercise to influence the opinion and politicians’ behavior.

  5. I don’t see how ending tax breaks on private jets is a salami strategy. The libertarians have already won their ideological war on spending. And besides, I’ve yet to hear any reasonable basis for the old slippery slope argument aside from paranoid speculation.

    Furthermore, the “let them burn” strategy is hardly welfare maximizing. Forcing the big government bureaucrats to rein in their spending could prove be emotionally satisfying, but the externalities involved would be massive. Advocating such a policy is borderline sociopathic.

    Yes, we shouldn’t be here in the first place, but now that we are here we have to let bygones be bygones. I doubt Hayek himself was so uncompromisingly dogmatic.

  6. Greg–
    Your presumptions are wrong and your insults are worn cliches hurled at anyone who dares to say something different. You may think you’re right simply because you repeat the platitudes of the current group think. Re your insult on anyone “Advocating such a policy..” I didn’t even advocate any particular policy but merely pointed out that feeding the spending is not the way to get it under control.

  7. chidemkurdas –
    “The rationality question is always interesting.[…]”

    Agreed. Good point. Sorry I didn’t get back here sooner.

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