Photo: Bloomberg TV
The fiscal cliff is just one quarter away, and the nation’s balance sheet has become a source of increased scrutiny and discussion.The bond king Bill Gross uses a rather unflattering analogy to describe the state of the nation’s finances. He believes “Breaking Bad” – a TV series where the life of chemistry teacher-turned-crystal meth producer deteriorates – is highly comparable to our debt crisis.
Gross, in a Washington Post op-ed, expounds:
Washington, it seems, has a similar story. Hooked on the temporary high of tax cuts and increased entitlements over the past several decades, the nation’s capital is approaching the end of the line traveled by most addicts: Reform, or suffer the consequences.
Gross cites reports which indicate that minor deficits from 2-3% of GDP are sustainable, but our current 8% budget deficit is self-destructive in the long term. If the current spending trajectory continues, government debt will exceed 100% of GDP and will weigh down economic growth.
However, Gross does not endorse any previous deficit reduction efforts. To him, using the Grand Bargain to repair the balance sheet is like bringing a knife to a gun fight:
The CBO’s fiscal gap of nearly 8 per cent, for instance, suggests we need to raise taxes or cut spending by an amount equal to $1.6 trillion per year. Yet the expiration of the Bush tax cuts and other provisions included in the congressional supercommittee’s “grand bargain” was a $4 trillion battle plan over 10 years, or $400 billion per year.
Gross isn’t a fan of the fiscal cliff either. As such, he presents his plan to reduce the massive debt burden:
Clearly, the ad hoc budgetary triggers set to take effect Dec. 31 are extreme and counterproductive on both the revenue and spending sides. Draconian cuts to defence and dangerous increases to middle-class tax rates are destructive fantasies…Instead, in late November, whoever has been elected president should focus on where the money is: higher tax rates on capital gains and income for the wealthy, and reduced long-term entitlements in Social Security, Medicare and Medicaid for all Americans.
This balanced approach to deficit reduction, which has some elements of Simpsons-Bowles, is the bond king’s plan to get us back on the right fiscal track. If not, Gross warns, the U.S. may be at risk of further downgrades from rating agencies, a loss of safe haven inflows, a devalued dollar, and higher interest rates that will adversely impact economic activity and make it more difficult to reduce the debt in the future.
Read the whole post at WashingtonPost.com.
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