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Perceptive analysis as always from Posner J on the Budget deficit. I’m not sure I agree with his description of the Republicans being enraged at Obama because of his centrism. The Posner/Becker blog is one of my favourite blogs (and one of the few I still regularly read, along with Bob Carr’s blog).

I also think its time to re-post this graphic:

Interest repayments are currently 6% of all money spent by the US Government. It is equivalent to 1/3 of all spending on non-social security/defence items. If the present position is absurd, imagine how absurd it will be if interest rates rise because the US’s credit rating drops. As the Atlantic has previously warned, interest rates can rise before the August 2 is reached. The reason that they have not already risen is that the markets continue to have confidence that the problem will ultimately be resolved (whether on the floor of the House or additional accounting tricks). If that confidence is shaken, it could have disastrous consequences for the US Budget and the US economy generally.

On the flip side, the deficit must be cut somehow, whether by tax rises or spending cuts. As Posner says, the deficit should not be allowed to grow faster than the economy in the long run.

It’s interesting that someone as eminent and respected as Posner, also a University of Chicago economist, is recommending that the Republicans accept a ratio of 1:3 tax rises to spending cuts. Others, such as David Brooks have preferred a 85:15 ratio (based upon past budget crises around the world which have been successfully navigated). I believe the Obama position is currently a 60:40 scenario.

I for one prefer the 85:15 ratio. Firstly, there has thus far been no political incentive to cut entitlements. We should cannot expect there to be any incentive to do it in the future – we must take advantage of this opportunity whilst we still can. Secondly, when you look at past budget reductions during a financial crisis, the 85:15 ratio has been a formula for success. We should stick with what we know in these times of uncertainty.

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