Congress: Progress on Deficit Reduction, but at What Cost?

November 16th, 2011
in econ_news

budget-cutting Econintersect:  There is news about the activities on Capitol Hill as the date approaches for an agreement to be hammered out that would lead to a $1.5 trillion reduction in the national debt.  Of course, that’s not an actual reduction, but a lowering of what the debt would have been extrapolating current spending and revenue.  One key area that is in the news involves inklings that tax “increases” might be acceptable to some Republicans, including Sen. Jon Cornyn (R, TX), Sen. Pat Toomey (R,PA), Sen. Charles Grassley (R,IA), Sen. Rob Portman (R, OH), Sen. Saxby Chambliss (R, GA), Rep. Mike Simpson (R, ID) and John Boehner (R, OH), Speaker of the House, according to an article at Bloomberg/Businessweek.

Follow up:

But some Republicans and their supporters are holding fast on taxes. From Bloomberg:

“Closing tax loopholes is all well and good,” said Americans for Tax Reform president Grover Norquist in an opinion article in Politico. “But doing so to raise revenues is just as much a tax hike as raising tax rates.” He added, “Any congressman who wants to keep his promise to voters to oppose tax increases” must oppose the plan.

Many Republican lawmakers are also unhappy with the proposal. “We don’t have a tax problem -- we have a spending problem,” said Senator Jim DeMint, a South Carolina Republican. “For us to get lulled into ‘how much to raise taxes’ in this thing is foolish.”

Senator Orrin Hatch, the top Republican on the tax-writing Finance Committee, said, “Some of these loopholes really aren’t loopholes.” He called them “important policy provisions, like the home interest mortgage deduction.”

Republican supporters of the plan say they are trying to lock in lower income-tax rates that will otherwise jump if, as is currently scheduled, the tax cuts enacted in President George W. Bush’s administration expire at the end of next year. President Barack Obama opposes extending the Bush-era cuts for those earning more than $250,000, and Republicans are unlikely in the 2012 elections to win the Senate votes they would need to keep the tax cuts in effect.

The “proposal” referred to above is an appropriations bill of $182 billion nearing completion in a House-Senate negotiations process (Newsday).  Republicans showed interest in increasing science and infrastructure spending, while cutting back on regulation.  From Politico:

A spending package of more than $182 billion took final shape late Monday after an intense week of House-Senate negotiations that posed a first test of how the two political parties will implement appropriations caps agreed to in the August debt accord.

Republicans gave back more than $1 billion that the House had previously cut from food programs at home and overseas, even as the GOP betrayed its own appetite for increased science and infrastructure funding. Democrats protected Amtrak and community policing priorities, yet in a blow to Wall Street reforms, were forced to accept a one-third cut from President Barack Obama’s budget request for the Commodity Futures Trading Commission.

The cuts in the CFTC funding are of particular note for two reasons.  The first is that the responsibilities of the CTFC are greatly increased under the Dodd-Frank act for improved financial regulation.  This was highly criticized by some as an effort to defund the Dodd-Frank implementation.  From Politico:

“We have seen the results of an ill-funded and ill-equipped regulator. It isn’t a pretty picture,” Bart Chilton, a Democratic member of the CFTC told POLITICO. “Congress can fund our agency, and we can do the job they have instructed us to do, or we will have to pick and choose priorities. We certainly can’t do it all without the needed resources.”

“Not funding the CFTC is like taking the police off the streets in a high-crime area, which is what Wall Street is,” said Dennis Kelleher, president of BetterMarkets, a nonprofit financial watchdog.

“Risky trading in dark markets is highly profitable to Wall Street and very expensive for every other person in America. They got billions in bonuses, and we got the bill for trillions of dollars to clean up their mess. The only way to prevent them for doing that again is to make sure that the CFTC has the funds to do their job.”

The second reason the CTFC funding restriction is of interest, it comes at a time when the agency has been saddled with an additional burden in sorting out the MF Global collapse fiasco and investigating $600 million missing investor funds.  Better Markets suggests that not adequately funding the primary regulatory agency investigating the MF Global case is increasing the probability, size and cost of another financial crisis.  From Better Markets:

The costs of the 2008 financial crisis were massive and are still being felt throughout the country with 25 million or so Americans either unemployed or underemployed as well as tens of millions more suffering from historically high home foreclosures, all with no end in sight. That doesn’t even include the trillions of taxpayer money that was lent, spent, invested, borrowed, pledged and otherwise used to prop up the financial system in 2008 to prevent it from collapsing and taking our entire economy down with it.

The Dodd Frank regulatory reform act was intended to try to prevent that from happening again, but that depends entirely upon regulatory agencies like the CFTC being fully funded and putting their cops on the Wall Street beat. No cops, lots of crime. Not complicated. Cutting those budgets and preventing them from doing their jobs all but guarantees another crisis. The only question is when, not if, and then the question will be how big a bill will they stick the taxpayers with next time.

Sources: Bloomberg/Businessweek, Newsday,   Politico and Better Markets

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