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The Fiscal Trap

Quantitative easing won’t solve our deeper problem.

Dec 6, 2010, Vol. 16, No. 12 • By LAWRENCE B. LINDSEY
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That is why immediate action on the deficit is required.

The co-chairs of the president’s deficit commission came up with a plan to stabilize both taxes and spending at 21 percent of GDP over time. The plan would raise the tax share of GDP from its current artificially low level of 14.6 percent to 19.3 percent by 2015 while bringing down the spending share from 23.8 percent to 21.4 percent. Even though taxes make up the majority of the deficit reduction, the improved efficiency from the tax reforms being proposed would likely offset the drag on growth. And, despite some knee jerk comments in opposition to the proposal from some on the left, both the tax code and the Social Security system are made more progressive in the process. While one can quibble with the details, thoughtful people across the political spectrum could support this plan.

But action is needed immediately. Even the sweeping reforms the commission is suggesting will be overwhelmed if borrowing costs rise. We can either act or slide Japan-like into a deflationary future with rising unemployment. We can live well for a bit longer, with high deficits covered by printed money, but then pay the consequences through ruinous inflation and a loss of faith in the dollar. Either way, the fact is that this is probably our last chance to escape our fiscal trap.

Lawrence B. Lindsey is president of the Lindsey Group and a former governor of the Federal Reserve.

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