Here is my two cents on the debt ceiling negotiations:

It is a spending problem and it is a growth problem. Past solutions have delivered on tax increases but failed to deliver on spending cuts. It is clear that increasing tax rates do not often yield increased tax revenues. It is jut simple proven economics.

This does not mean that decreasing rates will always yield revenue increases although it did for Coolidge, Kennedy, Reagan, and Clinton and to a limited degree it did for W.

The problem with the revenue addition is that it too often retards growth which is the better solution, but growth is also facing other friction costs and shifts, many within political control and some that are not.

I would accept revenue increases in the form of reduced deductions. Reagan cut rates but reduced deductions. The effective tax rate is different from the statutory and effective tax rates have changed less than statutory.

Clinton raised income taxes but cut capital gains and taxes on dividends. Many would consider this a Republican ‘tax cut for the rich’ strategy. It was successful.

It seems inevitable to me that Medicare and Social Security will be means tested. We can cry foul, but we have been lied to and defrauded and the money is just not there. Be grown up and face the reality. At least in the private sector people who do this, like Bernie Madoff, serve time. In government these people are honored by having streets and bills named after them.

Screwing with possible default is a fool’s game. I am uncertain if the GOP is not pushing this too far or how much is just partisan scare mongering. I am also uncertain how the balanced budget amendment will work out. My fear is it is one more cowardly abdication of congressional power with serious negative consequences. It will likely become a way to increase taxes without Congressional responsibility. It is much easier to maintain a balanced budget than to return to one after straying far from it for years. The final language could mean everything since it will likely be full of loopholes and exceptions. I see no harm is punting on this until the next elections.

Extreme costs cutting, which I support, could well tilt the economy downward unless there are other reductions in friction costs that engender economic growth. I doubt many of us have factored in the economic pain that may come with dramatic cost reductions. Yet this is not a situation you can tax your way out of. Costs must come down in a meaningful way. That is the bottom line that turned the house last November.

I support tax reform and simplification. But it should not be part of this package because it is just too involved and should sustain considerable debate.

My inclination: pass on the balanced budget amendment till after 2012, cut as aggressively as you can, reduce a few deductible items and call it a tax increase, raise the debt ceiling to last at least a year. This agony should not be repeated. It should, however, dominate the coming campaign.

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