Economist: The debt ceiling battle is won, but deficit war will be lost without cuts, reforms

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  • capitol
    (Photo: Reuters / Joshua Roberts)
    A statue stands in Capitol Rotunda on Capitol Hill in Washington July 31, 2011.
By Stephanie Samuel, Christian Post Reporter
August 3, 2011|8:29 am

President Barack Obama avoided a debt ceiling crisis with Tuesday’s signing of the compromise bill. But economics fellow J.D. Foster warns that Congress must now convince credit rating companies that the nation is serious about eliminating the deficit if it wishes to protect America's credit.

Foster, a senior fellow of economics of fiscal policy at the Heritage Foundation, said America's Triple-A rating may have been spared from an August 3 collapse, but cautioned, "Ultimately, the credit rating agencies are going to be following the markets, not leading them."

America is enjoying a false sense of comfort, he contends. The debt ceiling has been lifted by an additional $400 billion, and the 10-year Treasury bond yield – the benchmark of the nation's economic health – rests at a favorably low of about 2.67 percent.

"At the moment the credit markets don't seem too worried about [America's credit rating]," he summed.

But the coast is far from clear.

"Essentially what has happened is that we've made some progress on deficits," explained Foster. "But a lot more [progress] needs to made, and the markets are going to be ... waiting to see if additional progress is going to be made in the next two years."

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The president acknowledged the need for additional steps in his Rose Garden address.

Obama praised the deal's passage, stating, "It's an important first step to ensuring that as a nation we live within our means."

He continued, "This is, however, just the first step. This compromise requires that both parties work together on a larger plan to cut the deficit."

The plan, passed in the Senate Tuesday by a 74-26 vote, establishes a 12-member bipartisan committee tasked with designating $1.2 to $1.5 trillion in cuts by Thanksgiving.

During a White House conference call, senior adviser David Plouffe said the commission's reduction proposals "will fall largely in the areas of tax reform, closing tax loopholes for the very wealthy [and] for corporations, making sure that the middle class are protected, lower tax rates ... as well as entitlement reform."

Foster is skeptical about the future effectiveness of the committee. While he says there is a chance that members may successfully pass the trillion-dollar reductions, he also questions if it is more possible that the committee will be hampered by partisan bickering.

"As for the joint committee I don't expect it to be anything more than another opportunity for people to debate policy but without anything becoming of it," he said.

If the committee does not successfully propose reforms, automatic trigger cuts will be made to various budgets such as the military's budget

While this enactment mechanism may sound like a favorable backup, Foster say the automatic cuts are punitive in nature and will likely be so severe no Democrat or Republican will support them.

"Nancy Pelosi might like to see massive reductions in defense spending [but] the kind of reductions in defense spending that would be following from these sequestrations are so extreme that even her own membership is going to oppose it," he described.

If Congress votes to void the automatic cuts after failed committee discussions, then the compromise bill would have resulted in no cuts, Foster affirmed.

Foster says the committee must seek to reform all entitlement programs in order to prevent against a fruitless debt bill.

"The entitlements are definitely the source of the deficit," he said. "Whether is it social security, Medicare, Medicaid, veterans benefits, farm price supports, you name it, these [programs] are all in serious trouble and pose a very serious threat to the nation’s future."

President Obama seemed to express openness to broad reform, calling for an approach where "everything is on the table."

"That means making some adjustments to protect health care programs like Medicare so they're there for future generations."

However, he also called for tax increases for the wealthiest Americans and the biggest corporations.

"We can't make it tougher for young people to go to college, or ask seniors to pay more for health care, or ask scientists to give up on promising medical research because we couldn't close a tax shelter for the most fortunate among us," Obama said Tuesday.

Foster criticized the president's view of the problem.

"We have a deficit because we spend more than the revenues we take in. Well, all you have to do to reduce the deficit is to reduce the spending," he reasoned.

The tax increases are not needed to fix the economy, Foster concluded. Rather they are a left-wing "policy preference." "[Democrats] want to see higher revenues because that permits higher spending," he said.

Foster argues raising taxes on the wealthy and corporations raises very little money and will have an adverse reaction on the job market.

Taxing the rich, he says, encourages them to work less and invest less.

"[If] you raise taxes on corporations, you're going to drive economic activity to other countries," he warned.

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