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Obama-Ryan Budget War: Simon Johnson Says Both Plans Are Wrong

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President Barack Obama brutally attacked the House-passed Republican 2013 budget proposal Tuesday, calling it a "Trojan horse" that would be "a radical vision" for the country, disguised as deficit reduction plan.

Total U.S. debt today sits at $15.6 trillion. Adhering much to current law, the Congressional Budget Office predicts the country's debt will amount to nearly 70% of gross domestic product (GDP) by year-end, a level not seen since the days following World War II, and will reach 84% of GDP by 2035.

"It is thinly veiled social Darwinism," Obama said of the plan proposed by House Budget Chairman Paul Ryan. "It is antithetical to our entire history as a land of opportunity and upward mobility for everyone who's willing to work for it -- a place where prosperity doesn't trickle down from the top, but grows outward from the heart of the middle class."

Simon Johnson, M.I.T. professor and senior fellow at the Peterson Institute for International Economics, joined The Daily Ticker's Aaron Task to discuss his new book, White House Burning: The Founding Fathers, Our National Debt and Why it Matters to You, which focuses on the implications of America's mounting government debt and how to fix our fiscal mess.

He agrees with Obama that the Ryan plan, which would cut $5.3 trillion from government spending (including cuts to Medicaid and Medicare and tax cuts), is "pretty radical," but he's not happy with Obama's plan, either. "I have something tough to say about both sides," he says.

According to Johnson, Ryan's plan won't do much to rein in the country's deficits because it involves too many tax cuts. "You've seen that before, you get the tax cut upfront, and then there is a promise there is going to be economic growth and the tax cuts will pay for themselves," he says. "That, I am afraid, is an illusion."

The other "big weakness" for Ryan's plan is his proposed cuts to Medicare, which have not been proven to do much to reduce spending. The CBO has not scored his proposal because the plan, to date, remains too vague to analyze.

On top of that, Ryan's proposed cuts to Medicare could actually raise health care costs for many Americans as the cost for care shifts from the government to individuals and their children.

The way to fix out budget deficit is to restore revenue, says Johnson. At the same time, he notes that we didn't get into this crisis due to over spending on frivolous programs."This is not about runaway federal government spending," he says. The genesis for the debt problem, Johnson says, is years of tax cuts, two wars and a financial crisis, which wrecked havoc on the economy and tax base.

A starting point to increase revenue would be to let the Bush tax cuts expire at the end of the year for everyone, not just the wealthiest Americans. This is one area where Johnson takes aim at Obama's budget plan -- the president wants to extend the tax cuts for middle class Americans and let them expire for the rich.

"I know that won't win me any popularity contests," acknowledges Johnson. "We should absolutely be paying for the government services that we get. Paying for Social Security and Medicare and you can only do that if you have a robust revenue base."

In addition to the unpopular idea of letting the Bush tax cuts expire, Johnson's other prescriptions for fixing our fiscal crisis may be equally distasteful for most Americans, including:

  • Increase the federal tax on gasoline by 50 cents per gallon over two decades.

  • Do not privatize Social Security.

  • Reduce health care costs by making the delivery of good care more efficient.

  • Cut housing subsidies, agricultural subsidies and transportation subsidies.

  • Eliminate or reduce tax loopholes or special tax breaks, such as the capital gains tax (this should be increased, he says) and the mortgage interest deduction, which should be phased out.

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