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‘Fiscal Cliff’ Was a Head-Fake, Budget Woes Are Here to Stay: David Stockman

Daily Ticker

Thought the “fiscal cliff” fiasco was over? Think again.

The deal to avert the cliff, which was signed into law at 11 p.m. on New Year’s Day, was a “head-fake,” says David Stockman, director of Office of Management and Budget (OMB) during the Reagan Administration.

“This is a permanent problem,” Stockman tells The Daily Ticker. “The fiscal cliff is going to occur…over and over again.”

Related: Krugman: Yes, We Have To Fix The Deficit Eventually--But Not Now

The fiscal cliff agreement delayed the sequestration (i.e. more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1) to March 1 and made permanent the Bush-era tax cuts for all households except those earning $450,000 or more. The bipartisan compromise also extended unemployment benefits. The Congressional Budget Office (CBO) says the deal will reduce revenues and increase spending by nearly $4 trillion over the next decade.

Stockman opposes the Bush-era tax cuts (they were never affordable he says) and wants to see at least $200 billion slashed from the defense budget. According to the Center for American Progress, President Obama’s fiscal year 2012 defense budget request was $553 billion -- approximately the same level as Ronald Reagan’s 1986 fiscal year budget. Moreover, the defense department’s base budget rose from $287 billion in fiscal year 2001 to $513 billion in fiscal year 2009. “Emergency” war spending raised defense outlays to nearly $700 billion in 2010 and 2011, more than the $452 billion and $486 billion that was spent on Medicare during those same years.

Former Nebraska Senator Chuck Hagel, Obama's nominee to head the Department of Defense, testified at a Senate confirmation hearing Thursday. The nearly 8-hour testimony did not include questions about how Hagel, if approved as Secretary of Defense, would manage the country's military missions at a time when the department faces $1 trillion in cuts over the next 10 years.

Stockman blames the Republicans as much as the Democrats for being fiscally irresponsible.

Despite their cries for spending cuts and fiscal austerity, Republicans allowed the national debt to swell during the George W. Bush years, when they agreed to a bigger defense budget and higher education spending. In 2006 Congress also passed Bush’s Medicare Part D – a program that was supposed to subsidize the cost of prescription drugs for the elderly and curb wasteful drug spending. The program has ultimately cost taxpayers $1 trillion since its implementation.

Related: Health Care Spending Cuts are Key to Controlling the Deficit: Alan Blinder

The rancorous environment in Congress means no serious discussions about the nation’s fiscal health will happen in the near future, Stockman says.

“The ideological polarization is so great that the system has become dysfunctional,” he laments. “We’re drifting into a fiscal calamity.”

In addition to massive cuts to defense and entitlement programs, Stockman would administer a nationwide consumption tax as a means to raise revenue. He argues that a consumption tax is "economically neutral" but some economists say a consumption (or value-added) tax is regressive and actually increases income inequality. Lower and middle income Americans "consume" more of their income and save less than wealthy Americans.

Related: GOP State Income Tax Proposal Is "Reverse Robin Hoodism": Paul Krugman

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