http://www.familysecuritymatters.org/publications/detail/the-great-jobs-debate
The United States is having a major debate about how to get the economy going and create millions of new jobs. On one side advocates call for greater government spending on such things as roads and bridges, (“infrastructure”) and higher “taxes on the rich” to pay for the spending and also bring down the debt. On the other side are those who believe that keeping tax rates low and restraining government spending and regulation will spur the necessary investment to create jobs.
The problem with the debate is that if no deal is struck before the end of the year, a fiscal train wreck of massive tax increases and spending cuts happens automatically.
But you might say, Democrats want tax increases and Republicans want spending restraint, so is not this the best of both worlds?
Excellent question, grasshopper. To answer it, we have to first explain how this happened, and then second, go back to first principals as what makes an economy grow. Then we can answer your question.
HOW DID WE GET INTO THIS MESS?
First, how did this happen?
In 2010, with the 2001-2003 tax rate cuts and reforms scheduled to expire, the administration and the lame-duck Congress agreed to extend the tax rates through the end of 2012.
In 2011, with the House now under the control of the Republican majority, the looming European debt crisis and the growing US debt put into stark relief the central concern that had propelled much of the change in the 2010 elections. We were spending too much.
The US Treasury told the new Congress that the US could not borrow any more money unless its debt ceiling limit was extended some time in spring or early summer. The debt limit had been raised repeatedly and was considered “no big deal”. But the Republicans, especially their Tea Party supporters, and some Democrats said, “Not So Fast”. If we were going to increase our borrowing, at least offset the borrowing with an equal amount of long-term spending restraint or debt relief, they said. (1)
Well, the two sides could not agree whether there should be spending restraint or tax increases, or both, so they come up with a interim deal that threatened financial Armageddon unless they came up with a new deal by the end of 2012.
So in August 2011, the administration and Congress agreed that failing to come up with a deal, automatic spending cuts would occur beginning in 2013, reaching $1.5 trillion over ten years. Part of this were automatic across the board cuts of $100 billion a year starting in 2013, equally divided between defense and non-defense discretionary spending.
The debt deal also cut spending by $1 trillion immediately. Defense was cut $487 billion (a number the OMB simply pulled out of thin air!), which meant 14% of the Federal budget (DOD spending) had to come up with nearly half of all the immediate budget cuts.(2) At the same time, unrelated to the debt ceiling deal of August 2011, taxes in 2013 would go up on everyone–at $500 billion a year–as the tax reform of 2001 and 2003 would expire. So Washington faces both massive spending cuts and major tax increases in January 2013 if nothing is done to alter this coming fiscal train wreck.