Thursday, November 11, 2010

See Megan McArdle's helpful exposition of the deficition commission co-chairs' proposal.

Given so many negative reactions from Republicans and Democrats to this proposal, I can only increase my doubts that the federal government's long-term fiscal problems will be solved before bondholders lose confidence. Only an interest rate spike and the specter of imminent default will force the politicians to make the difficult, unpopular choices needed to match revenues and spending.

The least unlikely compromise I foresee is a sort of repeat of PPACA: some tax increases and some small immediate cuts, along with big promised future cuts in health care costs. When these future cost-cutting measure don't work out, another combination of tax increases and small immediate cuts will have to legislated. Repeat as needed. I think a fiscal crisis is more likely than Republicans going along with this, which in turn is more likely than Democrats and Republicans agreeing to unpopular, deep, non-health care spending cuts (even if they wait until after the unemployment rate is down to, say, 7.5%, which is probably more than two years away).

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