solving the Sequester and Moving to Prosperity

By Tom Pallow

America, Democrats, and the Obama Administration are at a crossroads. It is a clear fork in the road, and it is at the least the time to turn our direction signal one way or the other!

One road leads to the same unsolvable arguments that drive us at best through budget mediocrity and economic malaise. Yet taking the second road would be much like a NASCAR driver turning right. It is something that is rarely done and it is a bit different, but in reality it is very easy and more importantly it would lead to much less government debt and a much more prosperous, egalitarian, and environmentally sustainable economy.

The first road would include the sequester cuts beginning March 1st. Sure, even with the sequester cuts total federal spending would be $15 billion more this year than last year. But the sequester cuts are set to occur in defense and non-defense discretionary spending. These two areas respectively were scheduled to increase by 1.8% and 1.6% annually over the next ten years, while Social Security, Medicare, and Medicaid are scheduled to increase by 5.8%, 6.6%, and 8.5% respectively over the same period. Therefore, with the sequester cuts actual dollars will be cut from this years defense and non-defense discretionary budgets. Moreover, the sequester calls for across the board cuts without the ability to transfer funds from less pressing needs to more important ones. This would create many of the sequester horror stories that we have seen in the media lately that would have the effect of slowing our economy.

Because this first road drives through the sequester that would slow our GDP by about.6%, the $1.2 trillion in total federal savings over 10 years that the Budget Control Act was supposed to achieve would have very little hope of actually achieving that much federal savings. Moreover, $1.2 trillion, even if we were lucky enough to achieve that much savings, is such a small amount that our deficit to GDP and debt to GDP ratios will remain in a very sub-par position. That is, $1.2 trillion in federal savings would bring our deficit to GDP and debt to GDP ratios to manageable levels, but only if interest rates continue to stay at extremely low levels for an historically long period of time and/or the Federal Reserve continues QE3. No nation would want to remain in such a relatively potentially dangerous position that gradually over time does erode the purchasing power of their people. Moreover, there exists an intertwined relationship between economic prosperity and higher than we have now interest rates, and it would be great if our nation could experience broad economic prosperity once again!

Our economy can achieve broad economic prosperity once again if we take the second road. This second road can best be described as a timetable and commitment to enact new and innovative healthcare reforms that would save the federal government trillions of dollars and virtually every American much monies while also raising new tax revenues in new ways that actually incentivize private sector job growth in the US.

The first stop on this second road would be to avoid March 1st’s sequester cuts. This could best be done by acknowledging that President Obama is already smartly saving money by beginning to bundling Medicare payments through the Affordable Care Act. By paying Medicare providers in a bundled payment for most procedures per patient served, both healthcare providers and Medicare can save on administrative costs and some of the healthcare provider’s savings can be passed onto Medicare through cost shifting to the private sector. Furthermore, with this bundling payment system it will be much less likely that a financial incentive will exist for healthcare provider to charge Medicare for procedures that are not actually needed. Even though this Medicare bundling is only a pilot program at this point, with our federal government spending over $900 billion a year in healthcare payments, it is not difficult to imagine that $85 billion would be saved for the federal government once this bundling program has been fully implemented. The Republicans and President Obama should agree that this bundling program is going to save our federal government large amount of revenues and agree to a realistic ballpark number that can count against the $85 billion needed to end the sequester. In a further effort to reach out to Republican some of the rest of the $85 billion can be saved by enacting a majority of the items off of Congressman Eric Canton’s wish list of cuts and savings. If these two sources are not enough and other sources of savings can not be found, then the Pentagon and all domestic agencies should be granted the authority to move resources from less urgent needs to more urgent ones. After all, this shifting of resources by, more closer to the action management, should be something that all institutions, public and private, regularly practice if they care about efficiency. More importantly, any person involved with the American government should be ashamed of themselves as an American if their plan is to hurt and punish the American people in anyway in order to achieve what they shortsightedly see as political points that can win an election, especially when there exists this second road option that will avoid any of these pains!!! This authority will not only save the federal government money, but some of these moneys relatively soon can be shift to new, needed, and popular industrial policy and education programs.

As part of this papers sequester avoidance plan, March 27th’s continuing resolution deadline should be extended to May 18th when the debt ceiling is hit. In this way we can start to consolidate these “cliffs”, and therefore perhaps acquire the pressure to actually achieve the grand bargain that Republicans and Democrats both know needs to be achieved and soon. Or this new “consolidated cliff” could be placed at September 1st when the new budget has a deadline to be totally completed. But the most important element of this part of this paper’s plan is to create a fiscal cliff large enough to motive the creation of a grand bargain vote.

This is where our second road begins to take us to a much happier places. As part of this paper’s sequester avoidance compromise, it should be written into law that one single grand compromise bill should be voted on by May 18th 2015, but hopefully much much sooner and the sooner the better. The debt ceiling would also be extended until May 18th 2015, but not after if the specified amount of savings and new federal revenues in this papers plan is not found. This grand bargain should consist of exactly equal amounts of entitlement reform savings and new tax revenues.

In my last paper, “Two Grand Bargains and Fiscal and Economic Sanity,” that I wrote for the No Labels blog and that can also be found at, I lay out $15.5 trillion over 10 years that possibly can be saved and raised in almost equal amounts in federal spending cut and new tax revenues. Yet these spending cuts are not actually cuts. They are only four interrelated healthcare efficiency improvements that actually save virtually everyone money. Therefore these moneys can be spent on more desired things throughout the entire economy and by virtually everyone while ridding ourselves of our federal deficits. These four interrelated healthcare reforms are: allowing anyone to purchase private health insurance across state lines which can now be done much easier due to Obama Care, allowing private insurance options in Medicare, Medicare using it’s bulk purchasing power on prescription drugs, and tort reform within Obama Care. Just as beneficially, the tax increases in the above paper would actually incentivize private sector jobs in the US. This is because they are personal income tax rate increases and capital gains tax rate increases on the wealthy but with Employer Tax Carve Outs, one of them being Senators Collin’s and McCaskill’s recently proposed ETCO. Using the same assumptions as respected studies, it could be said that personal income tax and capital gains tax increases with Employer Tax Carve Outs can raise as much as four to five times the tax revenues than would equally sized and shaped personal income and capital gains tax increases without ETCOs (1). Progressive income taxes with ETCOs are the most efficient of all taxes because they extract monies from the part of the economy where the lowest velocity of money exists while protecting and incentivizing the areas of the economy that are most responsible for short and long term economic growth and prosperity. Much more on ETCOs can be found at The paper titled, “Why an ETCO is Much Better than Just Limiting Deductions for the Wealthy” and my July 2012 paper for No Labels would be most appropriate for you to read.

This grand bargain vote should consist of exactly equal parts of entitlement reform savings and new tax revenues. In this way, if no entitlement reforms and tax increases can be agreed upon, then the vote that must take place by May 18, 2015 will be meaningless. However, the debt ceiling would not be able to be extended beyond this point without other budget improvements. But at least Congress will have to take a vote. Maybe by then Congress will become disgusted enough with their own ineptitude that they will rise to the occasion. However, the deadline for this grand bargain vote is extended into the next Congress so that if this Congress does not have the courage and ambition to make a grand bargain before the next Congress, then the American people will be able to vote in a new Congress that will. Furthermore, if Democrats commit to this second road agenda and the Republicans do not cooperate, then the Democrats will win very very solidly in the 2014 election and Democrats will be able to pass this agenda in 2014 regardless. Also, as a way of further reaching out to Republicans and as good policy, the total amount of tax deduction reductions for the wealthy that are agreed upon could be used to increase the size of the Employer Tax Carve Outs. Remember, the larger the difference in effective tax rates between wealthy employers and wealthy non-employers, the greater will be the incentive for the non-employing wealthy and all talented people to find ways to employ in the US.

Of course we do not need, nor would we want to cut, $15.5 trillion over 10 years from our federal budget. But the $15.5 trillion, while it is a total of four healthcare reforms and two tax increases all while using fairly optimistic assumptions, it just goes to show that many inefficiencies in our federal government exist. Importantly, even if we had no federal debt and a budget surplus, we would want to get ride of these tax and healthcare inefficiencies! By doing so, we would allow wasted spending to be spent by more people and in more desired ways and our tax system would raise revenues while generating more economic prosperity. In order to get our debt to GDP and deficit to GDP ratios low enough so that interest rates could rise to more historic averages and the Fed would not have to continue QE3, it would be best in my opinion to raise and save at least $1.8 to $2 trillion over the next 10 years with this grand bargain vote. Further, do not underestimate how much confidence is justifiably reduced from our economy and financial markets due to the acknowledgment that interest rates can not move much closer to historic averages even if $1.2 trillion is saved and raised by the federal government over the next 10 years. But perhaps even more importantly, we want to retain enough revenues to fund new, needed, and highly popular industrial policy and education programs that would make our economy much more prosperous, egalitarian, and environmentally sustainable for us and the rest of the world. These new industrial policy programs are explained at, especially in my older papers.

It is time for us to make the right decision, flip our turn signal and take the best road. If not, the American people will justifiably find new and very different drivers and quickly!

1. Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.