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.