With the possibility of the government defaulting on its debt looming, it's worth
critically examining some of the more popular right-wing talking points.
The basic Republican argument is that out-of-control spending is driving deficits (we'll get to that below) and that higher taxes would destroy the economy. Republicans give the impression that taxes have never been higher. However, in reality, tax revenues as a percentage of GDP in the U.S. have remained remarkably stable over the past 40 years. In other OECD countries, tax revenues have increased by about 10%. It's highly unlikely that taxes are holding back the recovery and suspect that cutting taxes for wealthy people would do anything other than simply drive deficits even higher. Research suggests that tax rates have to be around 60-70% before there is any impact on economic growth (the highest marginal tax bracket right now is 40%).
What about government spending? The IMF data on government spending as a percentage of GDP are clear: not only is government spending in the U.S. relatively low by international standards (the average among the 34 countries surveyed was 43% of GDP; in the U.S. government spending is 41% of GDP). Government spending in the U.S. is lower than the austere Germany and is not projected to increase dramatically over the next four years.
Really? There have been three deficit deals so far: the "fiscal cliff" deal, the sequester, and the Budget Control Act. In each case, Republicans (who want lower spending and lower taxes) have gotten what they wanted while the Democrats (who prefer higher revenue) have gotten almost nil.
A small faction of Tea Party members have sabotaged the national dialogue from the beginning. Throughout negotiations with Obama and Biden, Boehner and Cantor constantly cited their rabid Tea Party caucus as the underlying reason for their intransigence. From the beginning Obama has put forward a simple offer for a grand bargain: entitlement reform, sustainable cuts to defense spending, and comprehensive tax reform that raises revenue. This is what essentially every deficit commission (Domenici-Rivlin, Bowles-Simpson, and the "supercommittee") has ended up recommending, and every time these deals were shot down by Republicans (every time citing revenues as their bone of contention). The problem isn't that Democrats won't negotiate. It’s that Democrats won't let Republicans hold the economy hostage in exchange for unilateral concessions.
The truth is actually far simpler. There is one major driver to U.S. deficits: health care. Unless we reign in the excessive cost growth, we'll have to savagely cut almost everything. To see how bad healthcare is in the U.S. consider that each year the healthcare system wastes $750 billion dollars (for comparison: total federal discretionary spending was $1.3 trillion in 2012).
Dean Baker and Peter Rosnick have shown that if U.S. healthcare costs were in line with health care costs of other developed countries, the U.S. federal deficit as a percentage of GDP would decrease over the next 80 years (see chart).
Healthcare costs are the most important driver of the deficit, and the Affordable Care Act represents a significant step towards reigning in healthcare costs. This isn't just liberal propaganda; it's the assertion of non-partisan groups like The Urban Institute, Kaiser Family Foundation and CBO. Certainly the recession has played a large role in the slowdown in healthcare cost growth, but the Affordable Care Act is also responsible, only three years after being signed into law.