President Obama to Face a Beast of a Problem in 2011

Republicans in the House and Senate, borrowing a page from Ronald Reagan, plan to stifle President Barack Obama's domestic agenda by using recently-enacted tax cuts as an excuse to reduce federal spending.

There is even a name for it – Starve the Beast.

"This idea that cutting taxes will lead to a reduction in government spending is often referred to as the 'starve the beast' hypothesis: the most effective way to shrink the size of government is to reduce the revenues that feed it," Christina and David Romer wrote in a 2009 scholarly paper titled "Do Tax Cuts Starve the Beast?  The Effect of Tax Changes on Government Spending."

In a 1981 speech, President Reagan put it in simpler terms: "Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance."

Republicans have made it clear that they plan to reduce the "allowance," perhaps by as much as $100 billion a year.  A sampling of the Sunday, November 7 talk shows suggests that they are reading from the same script:

Senate Minority Leader Mich McConnell (R-KY) on CBS' Face the Nation: "We don't have a revenue problem.  We have a spending problem."

House Minority Leader Eric Cantor (R-VA) on Fox News Sunday: "The election result reflected the fact that people get Washington does not have a revenue problem. It's got a spending problem."

Senator Rand Paul (R-KY) on ABC's This Week: "Well, I think it's not a revenue problem. It's a spending problem."

Rep. Paul Ryan (R-WI) on Fox News Sunday: "We do not have a revenue problem.  We have a spending problem."

In truth, the federal government has both a revenue and a spending problem.  And, the revenue problem was exacerbated by a compromise between President Barack Obama and Republicans to extend the George W. Bush tax cuts, the only U.S. tax cuts adopted during wartime, for another two years.

Obama campaigned on a pledge to extend the 2001 and the 2003 Bush tax cuts only for individuals earning less than $200,000 a year and couples making no more than $250,000 annually – 98 percent of all taxpayers. However, Republicans insisted on an extension for the top 2 percent at a cost of $81.5 billion during the next two years. The price tag for extending all the cuts during that period will be almost $545 billion.

Raising the individual estate tax exemption from $3.5 million to $5 million (from $7 million to $10 million for couples) will provide another $25 billion in tax reductions during the next two years to the top 1 percent of estates, according to the Urban Institute-Brookings Institution Tax Policy Center.

Republicans fought for a tax cut for the wealthy at a time when the gap between rich and poor is the largest on record.

In an interview on 60 Minutes, former Reagan Budget Director David Stockman observed, "In 1985, the top five percent of the households, wealthiest five percent, had net worth of eight trillion dollars, which is a lot.  Today, after serial bubble after serial bubble, the top five percent have net worth of 40 trillion."

Just as Republicans fought for the wealthy, Obama fought equally as hard for extending tax breaks for the middle class, which is not as beleaguered by taxes as the president has depicted.

According to the Tax Policy Center, Americans are paying federal taxes at one of the lowest rates in history. In 2000, the year before the first Bush tax cut went into effect, the medium-income family of four paid eight percent of its income in federal taxes.  That figure has dropped to 4.6 percent, the second-lowest percentage in the past 50 years.

Overall, U.S. citizens pay the third-lowest rate of combined taxes – local, state and federal – than all but two of the world's 27 industrialized nations, according to the Organization for Economic Cooperation and Development (OECD). Only Turkey and Mexico have lower rates, which are measured as a percentage of the gross domestic product (GDP).

Corporate tax rates in the U.S. are lower than all developed countries except Austria, Iceland, Germany, and Turkey.

Still, Republicans and Democrats are lobbying to make some or all of the Bush tax cuts permanent.

David Stockman said elected officials know that the U.S. is in no fiscal position to extend any of the cuts.

"It's rank demagoguery," he said in the 60 Minutes interview.  "We should call it for what it is.  If these people were all put into a room on penalty of death to come up with how much they could cut, they couldn't come up with $50 billion, when the problem is $1.3 trillion.  So, to stand before the public and rub raw this anti-tax sentiment, the Republican Party, as much as it pains me to say this, should be ashamed of themselves."

But they are not.  Many in the GOP, who now profess to be so concerned about federal spending, did not express any outrage when George W. Bush was racking up record deficits.

Bush inherited a $236 billion surplus from Clinton.  But, the deficit rose under Bush to $1.4 trillion in 2009.

To deal with the mounting deficit, Republicans want to "starve the beast."

But the research paper by Christina D. Romer, who served until recently as chair of President Obama's Council of Economic Advisers, and David H. Romer, her husband and former MIT classmate, concluded: "The results provide no support for the hypothesis that tax cuts restrain government spending." Instead, the couple argues, "Tax cuts may increase spending." They explained, "The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases."

The problem with most Republicans trying to starve the beast is that they want to exempt big-ticket items such as defense, homeland security, and Medicare.

"If you look at a pie chart of federal outlays, discretionary spending being red, non-discretionary being the blue, the blue is already over half way mark and it's growing in double digits," Republican Minnesota Gov. Tim Pawlenty said in an interview on MSNBC. "Anybody who comes in here and tells you they're not going to cut anything other than waste, fraud, and abuse, they're not going to touch entitlements – they're lying to you.  If you want to deal with the spending issue, in terms of federal outlays, you got to deal with interest on the national debt, Social Security, Medicare, Medicaid…"

Pawlenty is correct.

It is important to remember that the federal budget is divided into two basic categories: mandatory and discretionary spending. Mandatory spending, which comprise 59.3 percent of the budget, is spending that does not require Congress to act each year.  That category includes Social Security and Medicare.  Discretionary spending represents 35.2 percent of the budget and includes programs or federal agencies whose funding must be re-appropriated by Congress each year.  Another 5.3 percent of the budget goes toward paying the interest on the national debt.

With that 35.2 percent that Congress has to work with each year, the Defense Department receives 20.3 percent, leaving approximately 15 percent of the budget from which to make all those cuts. That remaining 15 percent covers such items as veterans' health, which is the largest non-defense discretionary program; education, transportation, airport security, and the environment.

According to an analysis of Congressman Boehner's budget proposal by the Center on Budget and Policy Priorities, "The plan would require immediate cuts of $101 billion – or 21 percent – in funding for discretionary programs other than those funded by the defense, homeland security, and military construction and veterans appropriations bills … This would represent the deepest cut in funding for these programs from one year to the next in recent U.S. history."  A 21-percent cut in K-12 education funding would mean a reduction of $8 billion, the center figured.

In the past, providing tax cuts has done nothing to strengthen the nation's economy.

According to an article by Michael Linden and Michael Ettlinger of the Center for American Progress, "The Bush tax cuts have directly added $2.5 trillion to the national debt in the full 10 years that they have been law."

Conversely, Bill Clinton created many more jobs than Bush while raising taxes.

Linden and Ettlinger explained, "President Clinton, after raising taxes in 1993, oversaw an economy that went from 111 million jobs in August of that year (the month Clinton's budget plan passed, including the increase in taxes) to 129 million jobs six years later – an increase of 16.2 percent, and more than three times better than under the Bush tax cuts. "

In many respects, President Obama may find himself in situation similar to the one Bill Clinton was in after Democrats lost both houses of Congress in 1994.

Robert Reich, who served as Clinton's Secretary of Labor, recalled: "The price [Federal Reserve Board Chairman Alan] Greenspan exacted from Clinton – and a resurgent Republican Congress demanded – was a balanced budget.  As a result, Clinton had to give up much of his 'investment agenda' in education, infrastructure, and other long-neglected means of building the productivity of average working Americans."

Rep. Jesse Jackson, Jr. (D-IL), one of Obama's presidential co-chairs in 2008, worries about a resurgence of Reaganomics, a term used to refer to the economic policies of Ronald Reagan that featured low taxes, low spending on social services, high military spending, decreased federal regulations, and the trickle down-theory.

In a statement issued just before Congress voted to extend the Bush tax breaks, Jackson said, "If we recklessly cut taxes for the wealthiest 2 percent, then Obamanomics will look an awful lot like Reaganomics."