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214 8 Landof theFree stimulating the national economy for international security I write this book on the brink of the 2012 presidential election. A highly polarized House of Representatives has been debating whether, on the assumption that no increase in taxes can be allowed, to cut another $50 billion next year from military spending and as much from various domestic programs that provide Medicaid, food stamps, and other benefits for poor Americans. If so, the cut next year would be the first installment of a ten-year sequestration. Whether that outcome proceeds is unclear, but the issues remain: what, if any, tax revenues will be increased; what, if any, entitlements will be cut; what discretionary (nonentitlement) expenditures, including defense, will be cut; and when and how will all or any of this be phased in? (Keep in mind that defense spending apart from war costs accounts for about 4 percent of GDP while health care approaches 20 percent.) Meanwhile we citizens are barraged with advice urging us to advance technology innovation, enable a smoother flow from battlefields to stateside jobs, and improve science and math education. How can we act on all that when some of our political leaders run on platforms of “no compromise” and legislators vehemently disagree on principles and details or how to implement them? Decrying putative U.S. decline is not enough. Exhortations are not enough either. And practically all road maps for action, including my own, lack credible political strategies to accomplish all those goals. Meanwhile, domestic and international challenges mount, interact, and reinforce one another. Obviously we cannot deal with international challenges if our 08-2382-0 ch8.indd 214 9/6/12 4:14 PM Land of the Free   |   215 polity is dysfunctional, uneducated, or in economic depression. As unemployment persists, corporate CEOs blame uncertain taxes and regulations as the reasons why they aren’t investing in more workers. Those are not the main reasons. Companies need to know there will be a demand for their goods or why invest or hire to produce more or new products? Will people spend their money, and if so, on what? That is why stimulating demand is the right thing to do. Government can stimulate demand by extending unemployment benefits and reducing withholding taxes so people have more money to spend. If done in the near term, we’d increase the market demand so that firms that do the investing and hiring can have a reasonable expectation of selling their goods and services. Without market demand or its expectation, more hiring won’t happen. To argue that a demand isn’t there because people are worried about their incomes amounts to circular reasoning. If nobody else provides market demand, the government has to do it. Stimulus is not a substitute for drastically revising the tax code and the entitlement structure. Government also has to reduce future deficits to an acceptable level. A reasonable measure is a deficit, excluding interest on the debt, that is a percentage of the GDP roughly equivalent to the rate of real GDP growth. The challenge, not an easy one, is to time the stimulus and the deficit reduction in the right way. The sensible approach is to slowly phase in the fiscal squeeze so that market recovery, aided by the stimulus, would add jobs and accelerate GDP growth to more than 3 percent a year. That squeeze includes slowly phasing in entitlement reductions and reducing the rate of government spending as the recovery gains strength. Getting the timing right will be difficult and requires wise action by the executive branch and Congress, as well as by the Federal Reserve. By writing that sentence, I’ve already exposed the flaw in my suggestion. But it is nevertheless the best, or least bad, approach because if we avoid deepening the pain now (which stringency would cause by slowing economic growth), we’ll be better able to weather that stringency later. If we do the opposite—crack down hard now as Britain and much of the euro bloc are doing—there’s a real danger of creating national disaster. Let’s look at what we ask for when we call for reducing entitlements or raising taxes or eliminating loopholes. Most Americans benefit from government social programs like Medicare and Social Security or “tax expenditures ”—that is, tax deductions or special treatment of some income, the 08-2382-0 ch8.indd 215 9/6/12 4:14 PM [18.119.160.154] Project MUSE (2024...

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