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Last updated: September 06. 2013 6:27PM - 63 Views

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Over the past several weeks Americans have seen their elected federal officials attempt to end the budget impasse that may send the country’s sterling credit rating into financial market oblivion. While it may seem this is all just politics as usual — and perhaps it is, as politicians (not statesmen) jockey for advantage — the possible damage to the U.S. economy and world financial markets is almost inconceivable.

For more than half a century U.S. Treasury securities have stood at the apex of the financial world, with Treasury bills, notes and bonds being the one and only example of a truly default risk-free financial instrument. Stated differently, once a debt instrument of the U.S. government was issued, the purchaser could be 100 percent assured they would be repaid both principal and interest in a timely fashion.

The country’s AAA rating was viewed as unshakable until the past few weeks, when Republicans and Democrats dug in their political heels and hit a negotiating brick wall in an attempt to increase the federal government’s debt limit. While this may seem like much ado about nothing, the implications for a world economy that relies upon the stability of the U.S. and its financial markets is almost unimaginable. The importance of re-establishing confidence in that AAA credit rating is undeniable by members of both parties, but each are acting to extend the turmoil and bring the country closer and closer to a technical default.

Within this context, one group — generally associated with the conservative “tea party” movement — has begun an effort to unfurl a “cut, cap and balance” pledge. Under the cut, cap and balance approach being pushed on Republican presidential-wannabes, the country would cut spending to bring down the near-term deficit (a good thing), set spending caps for the future (possibly a good thing), and require a balanced budget amendment to the Constitution (a not-so-good thing).

In laying out this proposal, proponents have wrapped themselves in the mantle of “conservatism” and seemingly declared anyone who disagrees with them to be wild-eyed tax-and-spend liberals who ought to be railroaded out of the conservative movement. As someone who has espoused a conservative, economic- libertarian philosophy for my adult life, I find this brand of “conservatism” to be rigid and inflexible, rather than being based on solid conservative principles which rely upon individual freedoms to maintain our vibrant, capitalistic system that has served us well for more than two centuries.

To be sure, I whole-heartedly support spending restraints as a means of achieving meaningful deficit reduction. And efforts to contain spending must, as I have noted in a number of past columns, include entitlement programs such as Social Security, Medicare and Medicaid. Unlike most of the cut, cap and balance crowd, I believe that certain “revenue enhancers” should be enacted. I specifically used the ridiculous term “revenue enhancer” rather “tax increase” as such changes are the elimination of tax subsidies rather than increases in taxes. Ones I have discussed recently are the elimination of tax subsidies to ethanol producers and Big Oil. While both industries are attempting to create the impression such subsidy roll-backs represent higher taxes, they actually represent the elimination of unfair competitive advantages that artificially favor one industry at the expense of others. And in a capitalistic system, such interference by government is unproductive and obnoxious.

Also of great concern for America’s economic future is the belief (and constitutional requirement) that a “balanced budget” is of paramount importance. While I again applaud the sentiment, such a straight-jacket approach is dangerous. Given demographic changes which are upon us, increased spending on many entitlements is unavoidable and would easily swamp a “balanced budget” philosophy without draconian cuts to these programs and people’s lives. As indicated in the recent “Will Americans celebrate another greatest generation” series, sacrifice will be required of many, but the dictates required by a balanced budget amendment would be horrific.

Such a rigid approach fails to recognize the difference between deficits and debt. While the U.S. certainly needs to control deficits/debt moving into the future, this is not the equivalent of saying there must be “balance” every year hereafter. By comparison, it is the fiscal equivalent of saying that families will no longer be able to borrow money moving into the future; that each year all families can spend no more than what their current income allows. No more mortgages, no more car loans, no more borrowing of any sort.

A preposterous notion for families and an equally preposterous notion for a nation for any but the most inflexible of minds.

Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at Ohio State University-Marion.


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