Despite its August recess, Congress remains technically in session. Its leaders of both parties should consult with President Obama and act to try to talk sense into S&P, which has caused a market meltdown with its understandable but not-technically necessary downgrade of U.S. bonds. Rather than berate S&P publicly, American political leaders should consult with S&P privately to see if a few quick steps would convince the rating agency to call off the dogs.
Here are three steps I believe could be done rather quickly, without necessitating extensive hearings or debate, that would help the debt outlook. First, it would be a relatively easy affair for Congress to pass a law instituting a temporary cut in corporate income taxes for repatriated businesses down to 5 percent, as presidential candidate Rick Santorum has proposed. This actually, by all accounting, would create both a short-term revenue gain (5 percent of something is always more than zero percent of anything) and, in the long-term (as the special repatriation rate ends), would continue to generate more revenue if any of the repatriated firms actually remain in the U.S.A. (Some groups argue that the immediate boost in revenues would be about $50 billion, but that it would lose money in the long run. I buy into only the first assessment; I don’t see how one can count as a revenue loss some revenue that otherwise would never come at all.) If I remember rightly, such an approach has been used in the past, and it worked.
Even liberal Democrat Chuck Schumer has proposed such a step, albeit with a spending idea attached to it. Considering the need to mollify S&P, though, perhaps Schumer can be persuaded to drop his “infrastructure bank” idea for now with promises that it will be at least on the table for the “supercommittee” budget talks coming up.
The second easy step would be to adopt a “chained Consumer Price Index” government-wide, as proposed by the Gang of Six. Forget the technical details for purposes of this blog post; all that’s necessary to understand is that by adopting some tiny changes in how government calculates its cost-of-living adjustments and its tax-rate indexing, spending in the out years can be reduced while revenues creep up just a bit faster, without really changing any economic incentives in any appreciable way.
The third step is one I’m not sure of, procedurally. As of February, the government had on its books more than $700 billion in “unobligated” funds. I think a small amount of these were rescinded in the Continuing Resolution deal this spring, but I believe that tens of billions of dollars more remain readily available. While I absolutely do not approve of frequent use of presidential Executive Orders, I am under the impression — and this could be entirely wrong, but I think procedurally it would be okay — that at least a portion of these funds could be wiped off the books by executive order, without further congressional action. Either way, congressional action itself shouldn’t be too too hard to expedite, if needed. And none of it should be controversial.
So there: Implement a cut-rate repatriation tax, adopt a chained CPI, and cut unobligated funds. Together, these steps obviously won’t come close to solving the long-range debt problems, but they will reassure markets, perhaps impress S&P enough to give the rating agency an excuse to undo its damage, and reassure the world that the dollar is a currency that won’t collapse. Slow, steady accretions of savings may just be the best way to steady not just the budget numbers, but the entire economy.