Why Government Doesn't Work

We saw a clear example of why governments fail to do the right things this week in the United States.

The position of the Obama Administration was clear:  The Bush tax cuts should not be allowed to continue on for wealthy Americans earning more than USD 250,000 a year.  This would be irresponsible as it would nearly a trillion dolllars to the national debt over the next decade at a time when the federal government is bleeding red at unprecedented levels.  However in a time of economic stagnation, unemployment benefits should be extended such that workers could be guaranteed up to 99 weeks of unemployment benefits.

The position of the Republicans was also clear:  The unemployment benefits should not be extended at a time when the federal government is bleeding red at unprecedented levels.  However in a time of economic stagnation, taxes needed to stay lower for all Americans including the wealthiest.

These two seemingly irreconcilable views led to an agreement that has now passed both Houses of Congress.  The package will extend the tax cuts for everyone (including the wealthy) and extend unemployment benefits to 99 weeks.  Neither side seems to worry too much about the impact on the levels of red ink that the government is showing.

This was a game of chicken in which both sides blinked and it led to an irresponsible deal.  The Bush tax cuts should have been allowed to expire.......on everyone.  The unemployment benefits should not have been extended.  Especially irresponsible was a cut to Social Security payroll taxes.  The SS system is headed for bankruptcy which will require higher taxes and a delayed retirement age.....why cut the contribution rate now?

It is true that recessions are not the best time to raise taxes but is there ever a really good time to raise taxes?  If these hard choices are not made now, then there is a heightened risk that a much more draconian budget would have to come in when the bond markets flee US Treasuries as they have done to various eurozone countries.

Remember that the accumulated national debt is simply a way of passing on our credit card bills to our children.  It's wrong.  It's immoral.  Elected officials should know better.

Ask the Irish and the Greeks whether they wish they had made these hard choices a few years ago.