Economy Now

Instant reaction and smart charts on economic trends.

How to avoid the looming budget train wreck

March 22, 2012: 9:17 AM ET

Republicans desperately do not want to raise taxes on the über-rich. And Democrats certainly don't want to gut entitlement spending for the nation's most needy. But with the Bush tax cuts and Obama payroll tax cut set to expire at the end of the year, and automatic budget cuts tied to sequestration set to kick in at the beginning of next year, it's clear that Congress has to do something to avoid what could be a very nasty economic hiccup.

Oh yeah, the nation might reach the debt limit again sometime after the election as well. So Americans may have to brace themselves for a "quadruple witching" -- to use the parlance of Wall Street traders -- in January 2013. How can lawmakers prevent such a nasty scenario from becoming reality? One former member of the Clinton administration has a bold proposal: let the Republicans have complete control over how to raise taxes and let the Democrats figure out what cuts need to be made to the safety net.

Dr. Robert Shapiro, chairman of Sonceon, an economic advisory firm in Washington, made his case for the mother of all compromises in a blog post this week titled "A Modest Proposal to Help the U.S. Avoid an Economic Train Wreck." I talked with Shapiro, who served as Under Secretary of Commerce for Economic Affairs in President Clinton's administration, to get more details. He said that he thinks the two parties are so polarized that the only way they can really work together is for them to agree to let the other party take full responsibility for changing what they hate the most.

WWJSD? Jonathan Swift would likely have some amusing suggestions for how Congress can avoid economic Armageddon.

"Will Republicans give up ambitions to change the nature of Medicare and Medicaid? The only way to do that would be to give them control of the tax code," Shapiro said.  "And would Democrats be willing to give up the desire to raise taxes on higher income people? Only if, in exchange, they got free rein to reform entitlement spending."

Shapiro calls for the Republicans to find ways to raise $1 trillion in new revenue and for the Democrats to cut back on $2 trillion in entitlement spending. It would be an interesting experiment. Sadly, I doubt that the leaders in either party would agree to it. But Shapiro said it may be the only way to keep the U.S. from yet another senseless trip to the economic cliff.

"It is not an acceptable response to let all the tax cuts expire. And we have dealt with the deficit in a totally mindless way that risks shutting down the entire economy," Shapiro said. "There should be a strong incentive to compromise, and that is a potential catastrophe in the beginning of a new term if they don't."

Makes sense. However, the cynic in me couldn't help but ask if Shapiro wasn't just suggesting something that he knew could never make it off the ground. I wondered if there was deeper meaning to the title of his blog post. "A Modest Proposal" is the name of the classic satire by Jonathan Swift where he argued that a solution to poverty in 18th century Ireland would be for people to, among other things, eat their children.

Shapiro assured me that he was not trying to be a comedian.

"It's an absolutely serious proposal. How do you resolve a conflict in which you have two highly polarized parties that don't trust each other and where power is evenly divided? It comes straight out of game theory," he said, adding that he called his plan modest because "whenever you make a sweeping proposal you want to make it sound humble."

Fair enough. I wish that our elected officials would listen to Shapiro. But, to use words that Swift created for the work he's most famous for, I fear that the coming budget battle is a Brobdingnagian issue being debated by people of Lilliputian intellect.

Join the Conversation
About This Author
Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

Powered by VIP.