I won't delve into the pedigrees of the appointees to the Obama Deficit Commission. Plenty of astute observations have already been made. As noted elsewhere the commissioners are mostly deficit hawks and small government loving entitlement hating fiscal conservatives. My only comment on the composition is that this will play somewhat like Galileo vs. The Inquisition. I won't even bother with the most obvious question of all: what are we doing worrying about the deficit and inflation while we are still in a deep recession with 9.7% unemployment and deflation as still the primary risk?
But if the Obama administration and the deficit hawks are determined to talk about deficits, then let's start with this: raising taxes on the well to do is likely to be the only real solution for government budget deficits. To get to a solution for the deficit, at all, will require a significant course change, because the dominant economic philosophy in the country remains Reaganomics. Republicans assume they can argue Reaganomics and win. They are right because the public remains in the thrall of it. The problem for the country is that Reaganomics doesn't work for anybody in the long run, not even the wealthy.
To begin with, the Reagan economic formula under which we now operate was flawed, as in kindergarten-repeat-the-grade flawed. It was a belief system rather than an analytically derived economic theory. It wouldn't stand up to even cursory examination when introduced and now there are empirical results to back up the conclusion that it was and is a two headed monster, called Trickle Down, consisting of tax cuts for the rich and Supply Side "economic" theory.
Reagan proposed the lowering of taxes to boost the economy. The economic growth that resulted would cover the loss of revenue from higher tax bracket cuts. It would push the tax burden down on the core economic engine, the middle class, who would make more money in the stimulated economy and generate tax revenue to replace the lost revenue from cutting taxes of the rich. That might have worked. There are technical reasons why that would not have been as efficient as other means. Taxation does not destroy money, it recycles it. It is economically neutral. Too much wealth does, effectively, destroy money. It does so by sequestering it out of the real economy into pure speculation rather than productive investment. So allowing the rich to accumulate more wealth than the economy can make use of dampens the effect of tax cuts for stimulating the economy.
Unfortunately, at the same time, the same crowd that advocated tax breaks to stimulate the economy also advocated Supply Side economics. Supply side said that wages don't need to increase if increased investment, presumably made available by tax cuts for the rich, creates efficiencies that lower the cost of consumer products and so lowers part of the cost of living for wage earners. The profit from increased efficiencies in business would be kept by business instead of being shared with labor as per the conventional economic wisdom theretofore. So that worked against the theory that cutting taxes would raise tax revenues from the middle class because the middle class got no raises. The tax burden remained on business, albeit at a lower rate due to loopholes, and on the rich at a lower rate still. It wouldn't even raise sales tax revenues as the amount of goods changing hands would go up but not the amount of money in circulation. So the whole increase tax revenues by cutting taxes theory was a bust because of Supply Side.
So same or lower wages paid to more efficient workers do not produce relative increases in tax revenue. But to make matters worse, job growth was eliminated by the same Supply Side philosophy, it justifying off shore job flight to achieve more "efficiency". So in effect, the combination of tax cutting for the rich to increase investment and job growth was more than nullified by Supply Side thinking in corporate and government leadership.
Conservatives might be disappointed that Reagan and Bush 43 grew government instead of making it fit the revenue stream it had, but they acted on the assumption that tax cuts would work to stimulate growth and pay for their "excellent adventures" in government, not thinking through the poison pill of Supply Side.
It's not surprising that two of the dumbest men to have ever have held the office of POTUS, Reagan and Bush 43, would fall for this. What is surprising is that the smarter one we now have continues to act as if this Reaganomic voodoo has any policy validity. The only force Reaganomics has is political, and that only because the moneyed interests pawned it off as an economic prophecy from on high. Those same moneyed interests will now lobby the Deficit Commission.
But the moneyed interests don't seem to understand that the wealthy now shoulder the bulk of the tax burden exactly because of the economic distortions of Reaganomics. Supply Side dampened wage growth. Wage growth would have allowed the tax burden to be shared by the middle class. So now the wealthy have a quandary that they do not seem to appreciate. Raising taxes on the middle class is not an option because if taxes were any higher on the already struggling, massive dislocations in living circumstance are likely to result, shrinking the economy by yards instead of the inches it has up until this point of inflection. The questions become: can the rich shove more standard of living losses onto the public and thus avoid paying more taxes in lieu of the public, and will doing that do them any good?
If wages were to go up, tax revenues from the bottom of the economic scale would go up, the tax burden on the rich could go down and the deficit/debt would be retired. The hawks on the Deficit Commission know this. But they do not equate taxes on the wealthy as the other side of the coin to wage cuts to employees, for some reason. In overall effect, cutting taxes for the rich is just a different way to cut pay for the working class, shrinking the economy.
Social Security and Medicare reform are an attempt to make the middle class eat more standard of living losses so that the taxes on the rich are not raised. So far, the public does not seem to recognize that, but are instead roped in by the rhetoric on how cutting entitlements will drive down the deficit. It won't, at least not for long. Shrinking entitlements will shrink the economy which will drive up the deficit through a further decline in tax revenue.
Further application of the flawed Reaganomics model will just make things worse, every time it's applied. A death spiral for the economy and the nation will result. In short, there is no way that the rich can win in the long run. They are damned by increasing taxes or damned by increasing wages or damned by a shrinking economy. It's a pity they could not see it coming.
Competent macro economic policy, informed by, say, Keynes rather than Friedman, would be to embark on a plan to re-couple wage and productivity growth. If wages can't be made to grow without undue shock to middle class small businesses, then tax the rich and subsidize small business wages until productivity and wage growth come back into balance. You could even make tax increases on the wealthy temporary with a target of rebalancing wages up. You can have low taxes or low wages. You just can't have both at the same time and expect profits and business opportunities to rise. This is because the American standard of living, rising, falling or unchanged, has a strong correlation with growth and profits.
There is waste and fraud and there are silly programs that can be cut out of government spending. But the social programs are not the systemic flaws they are argued to be, not education, not highways, not the military nor Social Security or Medicare/Medicaid. What these programs are is a part of a total compensation package for the work force of this country. They cannot be made to go away through denying the need for them as the need will still exist. If the federal programs are gone, the support for them will fall to individuals, families, boroughs, counties and states, who will then tax more locally and with a multiple in corruption for every subdivision of responsibility. The federal government took it all on because it was observable that business could afford it but would not accept responsibility for it all. Government has been proven right on both counts.
My message to the Deficit Commission, the President, and Congress is this. The primary question this Deficit Commission needs to be considering is the proper balance between distribution of wealth to the work force and to the formation of capital that will result in a viable economy. All economic policy should align to achieving that rational balance. Put the objective of policy in the open rather than obscuring the truth about their agenda in ideological smoke.