Obama Clearly Has An Agenda For The Defense Department

SPECIAL EDITORIAL: There’s No Case for Hagel

William Kristol

January 4, 2013 10:20 AM

In the three weeks since Chuck Hagel’s name emerged as President Barack Obama’s likely choice as the next secretary of defense, there's been a lively, if lopsided, debate about his qualifications for the job. The debate’s been lopsided because the arguments for Hagel have been so startlingly weak. 

It’s not just that those arguing for Hagel form an unusually motley crew, even by the standards of the anti-Israel swamp in which many of them frolic. What's striking about the case for Hagel is its absence. His backers can cite no significant legislation for which Hagel was responsible in his two terms in the Senate. They can quote no memorable speeches that Hagel delivered and can cite no profound passages from the book he authored. They can summarize no perceptive Hagelian analysis of defense or foreign policy, and can appeal to no acts of management or leadership by the man they'd have as our next secretary of defense.

The fact is that those legislative achievements, intellectual insights, or management triumphs don't exist. A long and comprehensive history of the Senate during Chuck Hagel's tenure there could be written that would barely mention him. A long and comprehensive account of American foreign and defense policy in the last thirty years would hardly note his existence.

So even if one left aside Chuck Hagel's dangerous views on Iran and his unpleasant distaste for Israel and Jews, a dispassionate analyst would have to conclude that the case for Hagel is extraordinarily weak. A host of individuals who've served in the Pentagon during President Obama's first term—like Deputy Secretary Ashton Carter, Navy Secretary Ray Mabus, and former Undersecretary for Policy Michèle Flournoy—are more qualified than Chuck Hagel to serve as the next secretary of defense. So are Clinton administration Defense Department veterans like Richard Danzig, John Hamre, and Joseph Nye. So are former legislators like Olympia Snowe, Sam Nunn, Dick Gephardt, and Bill Bradley. 

So are others from the private and public sector.

Or look at it this way. Over the last four decades, the following dozen men have served as the United States Secretary of Defense: Elliot Richardson, James Schlesinger, Donald Rumsfeld (twice), Harold Brown, Cap Weinberger, Frank Carlucci, Dick Cheney, Les Aspin, Bill Perry, Bill Cohen, Bob Gates, and Leon Panetta. They were all impressive public servants. Chuck Hagel clearly falls short of all of them in stature and distinction.

So why Hagel? Well, if you read the oeuvre of Hagel's defenders, you'll see that Hagel must be appointed in order to spite many of his critics, whom they deeply dislike. Hagel’s defenders are welcome to their dislikes. But dislike of hawks, neocons, or friends of Israel isn't really a good reason to select Chuck Hagel. And there's something comical about many of the defenses of Hagel. His defenders rise up in high dudgeon to condemn Hagel's critics as smear merchants for criticizing Hagel as anti-Israel and soft on Iran—and then, if they're among the honest Hagel defenders, they praise Hagel for being anti-Israel and soft on Iran. 

The fact is, criticism of Hagel has been substantive—focused on his out of the mainstream votes and his distasteful quotations, as well as his general lack of distinction. And the critics have also focused on the fact that the position being discussed is that of secretary of defense. No one would care if the president wanted to send Hagel off to openly and aggressively make the case for Obama's foreign policy as ambassador to Luxembourg. But the secretary of defense has real responsibilities.

Even his nomination has real consequences. In fact, nominating a person who is clearly soft on Iran would send exactly the wrong message to Tehran. Which is why President Obama should prevail in not nominating Hagel in the first place, and why members of Congress of both parties who have been engaged in the attempt to deter Iran from acquiring nuclear weapons should be particularly alarmed at a Hagel nomination. 

It looks, though, as if President Obama may be determined to nominate Chuck Hagel. If he does, he will be doing himself and the nation a disservice. The next secretary of defense should be a well-respected mainstream national security leader, not an out-of-the-mainstream mediocrity. So if the president nominates Chuck Hagel, we would expect a vigorous examination of the Hagel record by senators of both parties, followed by the United States Senate withholding its consent to his selection as secretary of defense. This would give the president another chance to select a man or woman of distinction for this high office, one who would command widespread support and would be confirmed easily. And this would be a better outcome for our military, the Defense Department, and the nation.

Economic Armageddon

AS THELMA SAID TO LOUISE, "THERE IS A POINT BEYOND WHICH WE CANNOT RETURN."

AHEAD OF THE CURVE

Last Update: 29-Jan-13 08:58 ET

The Real Battle In Washington

The real battle in Washington is not the debate over the debt ceiling. Everyone knows that it will be raised eventually. The real battle is whether the deficit is important – or not. 

If The Debt Ceiling Is Not An Issue 

The debt ceiling seems like it would be an important issue, but only if you embrace the idea that deficit spending is both dangerous, at excessive levels, and should be minimized, at least over time. 

If, for example, a core belief is that deficit spending can continue indefinitely, then the debt ceiling is simply a matter of paperwork. 

This seems to be the negotiating position of President Obama currently, on the deficit ceiling. 

The Republicans have been trying to use the impending debt ceiling as a negotiating bargaining chip. 

However, President Obama has realized that the Republicans have virtually no negotiation leverage with the debt ceiling. 

After all, if President Obama refuses to negotiate spending issues as part of raising the debt ceiling, it is virtually certain that the Republicans would be blamed for any default that the US might incur on unpaid debt. 

President Obama, with the help of the media, would be able to position any default as one that would be the Republicans fault. He might even be willing to let the US default if it could be clearly blamed on the Republicans. After all, the default would likely be temporary. 

If so, President Obama might be able to use this as leverage against Republicans in the 2014 elections. 

In fact, President Obama has little to lose in refusing to make spending reduction an issue in Washington.  

The Republicans have been slow to realize this, but that is because President Obama, who was once critical of the Bush administration’s deficit spending, actually does not seem to feel that deficit spending is a problem to be addressed. 

If Deficit Spending Is Not A Problem  

Who believes that deficit spending is not an issue? 

The leading public advocate of the benefits of deficit spending is Paul Krugman, Nobel Prize winning economist and a devote supporter of the Obama administration. 

Mr. Krugman has argued for a long time that the solution to the slow economy is even more deficit spending than has been done before. His main criticism of the stimulus spending of 2009 and 2010 has been that it was far too small. 

The question of how such spending is necessary to actually produce economic growth never seems to be brought up, but Mr. Krugman is adamant that the stimulus spending to date has not been enough. 

President Obama’s View 

The real question in the deficit spending debate is whether President Obama views the deficit as a problem. 

In the past, he was a vocal critic of the Bush administration’s deficit spending. 

In 2006, then Senator Obama made the following statement, when a vote on raising the debt ceiling: 

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

However, today, President Obama has been encouraging increased investment in education, infrastructure, without any reductions in spending for persons who receive government aid. 

This essentially could be interpreted to mean that President Obama does not really care about deficit spending, but without any recent  clear statements on whether he views deficit spending as an issue or not it is hard to speculate. 

We tend to think that President Obama is now more concerned with leaving his own personal lasting imprint upon the Presidency – and America – than he is with bring financial disciplines to Washington. 

If anything, President Obama probably believes that increased taxes are enough to keep deficit issues at bay. 

This was certainly his rallying call during the election process, when he repeatedly stressed the idea that the “rich should pay their fair share.” 

While such a viewpoint was a powerful campaign issue, as it aroused emotions, from a financial perspective, it was relatively minor. 

As we pointed out in an Ahead of the Curve column dated December 5, 2012 “The Absurdity Of The Fiscal Cliff Debate”, the argument over taxation of incomes over $250,000 only amounted to $42 billion worth of revenue in 2013 (assuming no change in behavior by taxpayers due to the new rates). 

What this meant is that the issues of deficit spending got swept under the rug of financially insignificant emotional issues during the campaign. 

This leaves the question of President Obama’s view on deficit spending largely unknown right now. 

It certainly doesn’t seem to be of the same importance as it is to Republicans.  

What this all means for the budget negotiations in the upcoming year is unpredictability. 

Does It Matter? 

So far, the markets have seemed to tolerate unpredictability in Washington’s fiscal direction, but we wonder how long such a patience will last. 

It is beyond the scope of this single article to discuss why deficit spending is an issue that must be addressed somehow. 

We have long argued that both new revenues and spending cuts must be addressed in order to avoid a runaway financial situation. 

The real problem is that deficit spending becomes an important issue when the purchasers of US debt begin to make demands on the social structure of the US. 

This is what has caused the turmoil  in Greece in recent years.  

There is an argument that the US could never become Greece, but if purchasers of US debt began to demand 7% interest rates, as purchasers of Greek debt did several years ago, the US might well lose control of the financial future.  

To rescue Greece, the European Union began to make demands on Greece to bring the annual deficit spending to a “realistic” level of 3% of GDP. 

The US currently has run a deficit spending of almost 10% of GDP for four years. 

The long term future of the US depends upon the credibility of the US dollar in the rest of the world. 

Extensive deficit spending slowly weakens that position over time. While we haven’t reached the critical point were confidence collapses, and a shift to some other global currency as the standard occurs, we are headed in that direction.  

How far away from the point we are, is unknown. 

The problem, of course, is that once the critical point of confidence in the US dollar is breached, it cannot be easily recovered. We can only hope that the political divisiveness in Washington doesn't bring us so close that we slip over the edge without intention from either side of the political argument. 

Comments may be emailed to the author, Robert V. Green, at aheadofthecurve@briefing.com 

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I Want A Divorce!

DIVORCE AGREEMENT

Dear American liberals, leftists, social progressives, socialists, Marxists and Obama supporters, et al:

We have stuck together since the late 1950's for the sake of the kids, but the whole of this latest election process has made me realize that I want a divorce.

I know we tolerated each other for many years for the sake of future generations, but sadly, this relationship has clearly run its course.

Our two ideological sides of America cannot and will not ever agree on what is right for us all, so let's just end it on friendly terms.

We can smile and chalk it up to irreconcilable differences and go our own way.

Here is a our separation agreement:

Our two groups can equitably divide up the country by landmass each taking a similar portion.

That will be the difficult part, but I am sure our two sides can come to a friendly agreement.

After that, it should be relatively easy!

Our respective representatives can effortlessly divide other assets since both sides have such distinct and disparate tastes.

We don't like redistributive taxes so you can keep them.

You are welcome to the liberal judges and the ACLU.

Since you hate guns and war, we'll take our firearms, the cops, the NRA and the military.

We'll take the nasty, smelly oil industry and the coal mines, and you can go with wind, solar and biodiesel.

You can keep Oprah, Michael Moore and Rosie O'Donnell.

You are, however, responsible for finding a bio-diesel vehicle big enough to move all three of them.

We'll keep capitalism, greedy corporations, pharmaceutical companies, Wal-Mart and Wall Street.

You can have your beloved lifelong welfare dwellers, food stamps, homeless, homeboys, hippies, druggies and illegal aliens.

We'll keep the hot Alaskan hockey moms, greedy CEO's and rednecks.

We'll keep Bill O'Reilly, and Bibles and give you NBC and Hollywood .

You can make nice with Iran and Palestine and we'll retain the right to invade and hammer places that threaten us.

You can have the peaceniks and war protesters.

When our allies or our way of life are under assault, we'll help provide them security.

We'll keep our Judeo-Christian values.

You are welcome to Islam, Scientology, Humanism, political correctness and Shirley McClain.

You can also have the U.N. but we will no longer be paying the bill.

We'll keep the SUV's, pickup trucks and oversized luxury cars.

You can take every Volt and Leaf you can find.

You can give everyone healthcare if you can find any practicing doctors.

We'll continue to believe healthcare is a luxury and not a right.

We'll keep "The Battle Hymn of the Republic" and "The National Anthem."

I'm sure you'll be happy to substitute "Imagine", "I'd Like to Teach the World to Sing", "Kum Ba Ya" or "We Are the World".

We'll practice trickle-down economics and you can continue to give trickle up poverty your best shot.

Since it often so offends you, we'll keep our history, our name and our flag.

Would you agree to this?

If so, please pass it along to other like-minded liberal and conservative patriots.

In the spirit of friendly parting, I'll bet you might think about which one of us will need whose help in 15 years.

Sincerely,

John J. Wall
Law Student and an American

P.S. Also, please take Ted Turner, Sean Penn, Martin & Charlie Sheen, Barbara Streisand, & (Hanoi) Jane Fonda with you.

P.S.S. And you won't have to press "1" for English when you call our country.

Forward This Every Time You Get It ! Let's Keep This Going, Maybe Some Of It Will Start Sinking In!!

Doug Kass Predicts 2013

Have a look at the following article by Doug Kass to learn what 2013 has in store for us:

Doug Kass: 15 Surprises For 2013

Wisdom For The Ages

1. In my many years I have come to a conclusion that one useless man is a shame, two is a law firm, and three or more is a congress. -- *John Adams*

2. If you don't read the newspaper you are uninformed, if you do read the newspaper you are misinformed. -- *Mark Twain* 

3. Suppose you were an idiot. And suppose you were a member of Congress. But then I repeat myself. -- *Mark Twain*

4. I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. --*Winston Churchill*

5. A government which robs Peter to pay Paul can always depend on the support of Paul. -- *George Bernard Shaw*

6. A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money. -- *G. Gordon Liddy*

7. Democracy must be something more than six wolves and a sheep voting on what to have for dinner. --*James Bovard, Civil Libertarian (1994)

8. Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries.-- *Douglas Case* (Classmate of Bill Clinton at Georgetown University)

9. Giving money and power to government is like giving whiskey and car keys to teenage boys.-- *P.J. O'Rourke*, Civil Libertarian

10. Government is the great fiction, through which everybody endeavors to live at the expense of everybody else. -- *Frederic Bastiat*, French economist (1801-1850)

11. Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. --*Ronald Reagan * (1986)

12. I don't make jokes. I just watch the government and report the facts. -- *Will Rogers* 

13. If you think health care is expensive now, wait until you see what it costs when it's free!-- *P. J. O'Rourke* 

14. In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other. --*Voltaire * (1764) 

15. Just because you do not take an interest in politics doesn't mean politics won't take an interest in you! -- *Pericles* (430 B.C.) 

16. No man's life, liberty, or property is safe while the legislature is in session. -- *Mark Twain * (1866) 

17. Talk is cheap, except when Congress does it. -- *Anonymous* 

18. The government is like a baby's alimentary canal, with a happy appetite at one end and no responsibility at the other.-- *Ronald Reagan* 

19. The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. -- *Winston Churchill* 

20. The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.-- *Mark Twain* 

21. The ultimate result of shielding men from the effects of folly is to fill the world with fools.-- *Herbert Spencer*, English Philosopher (1820-1903) 

22. There is no distinctly Native American criminal class, save Congress. -- *Mark Twain* 

23. What this country needs are more unemployed politicians -- *Edward Langley*, Artist (1928-1995) 

24. A government big enough to give you everything you want, is strong enough to take everything you have. -- *Thomas Jefferson* 

25. We hang the petty thieves and appoint the great ones to public office. -- *Aesop*

FIVE BEST SENTENCES 

1. You cannot legislate the poor into prosperity, by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it.

5. When half of the people get the idea that they do not have to work, because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation!

Fiasco Summary

THE BIG PICTURE

Last Update: 02-Jan-13 13:36 ET

Congress Strikes a Deal That Isn't Done

You have probably heard by now that Congress reached a deal to avert the fiscal cliff. The process of getting there wasn't pretty, which was no surprise, and the end result was less than expected, which was also no surprise. The stock market's initial response to the deal has been decidedly bullish. Again, that is not a surprise.

While we typically post The Big Picture on Monday, the developments in Washington have mandated a post today.

To be succinct, we understand why the stock market is rallying today even if we don't exactly understand what all of the hoopla is about. The deal that got done was another silly, last-minute drama scripted by Congress that dealt with tax rates, but essentially kicked the can down the road with respect to needed spending cuts and entitlement reform.

Deal Provisions 

The main provision of the deal calls for the income tax rate to go up to 39.6% for individuals making more than $400,000 a year and households with a combined income of more than $450,000. The lower tax rates below those income thresholds will be made permanent. Other provisions include:

• A bump in the capital gains and dividend tax rates from 15% to 20% for individuals making more than $400,000 a year and households making more than $450,000 a year 
• A one-year extension of unemployment benefits for the long-term unemployed
• A two-month delay in the $109 bln sequestration, which forced discretionary and non-discretionary spending cuts
• A permanent fix for the alternative minimum tax
• An increase in the estate tax from 35% to 40%, with the first $5 mln exempt for individual estates
• A five-year extension of the child tax credit, the earned income tax credit, and the tax credit up to $2500 for college tuition
• A one-year extension of the tax credit for R&D costs and the tax credit for renewable energy 
• A one-year provision that allows businesses to write off 50% of new investments immediately
• A one-year deferral of the 27% cut in Medicare payments to doctors 

It is estimated that $600 bln in new revenue will be raised over 10 years.  According to the non-partisan Tax Policy Center, $199 bln in new tax revenue will be collected in 2013.

First, the Good News

The good news, economically speaking, is that income tax rates are not going to increase for 99% of taxpayers.  That realization is at the heart of today's stock market rally.  All else equal, it is a compromise component that will prevent the economy from slipping back into a recession.

Things rarely turn out to be equal, though, so we can't categorically rule out the possibility that the US economy will slip into a recession this year.

We digress.

The other good news, relatively speaking, is that the maximum capital gains and dividend tax rates for high-income earners only went from 15% to 20% (it will end up being 23.8% after the surcharge to help pay for the Affordable Care Act).  There were concerns the dividend tax rate could be set at the highest tax rate for high-income earners, or 43.4% after the surcharge is included.

There are two benefits, therefore, tied to the capital gains and dividend tax rates: (1) there is the certainty of knowing what the rate will be and (2) the rate is not nearly as high as some participants feared it might be.

The latter consideration in particular should be regarded as a positive for dividend-paying stocks.

The accelerated depreciation and the extension of the tax credit for R&D costs were added bonuses for businesses.

...And Now the Bad News

Even though income tax rates will not be going up for the vast majority of taxpayers, all private-sector workers will see the rate on their Social Security payroll tax revert to 6.2% from 4.2%.   For a worker making $50,000, that amounts to $1,000 more coming out of his or her paycheck this year versus last year.

Another negative is that we don't think businesses are necessarily going to feel inspired to start spending liberally and hiring more aggressively. 

The tax rate headlines might sound good, but the fact of the matter is that the expiration of the lower Social Security payroll tax and the imposition of higher tax rates for high-income earners will be a drag on the economy by reducing personal consumption.  That's one issue. 

The other issue is that Congress and the White House are going to be battling again very soon on spending cuts, entitlement reform, and the debt ceiling.  They shouldn't be intertwined, yet they will be since the debt ceiling is going to be used as leverage by the GOP for extracting spending cuts. 

President Obama has already said he won't negotiate around the debt ceiling, so it is pretty clear that battle lines are being drawn and that the next few months in Washington could be a bloody mess on the legislative front.

That means political uncertainty will continue to act as a deterrent, or simply a convenient excuse, for businesses to defer spending decisions.   At the same time, it will pose a real risk of another downgrade to the US credit rating that could roil capital markets.

Bad Is Better than Worse

With the deal that got done, the prospect of a worst-case recession scenario was reduced to a bad scenario of lower economic growth.  Accordingly, the equity risk premium has come down in response to the tax rate compromise since bad is better than worse.  It's a relative assessment, yet all things are relative for equity market participants.

In that regard, longer-dated US Treasuries are getting clipped pretty good today, but perhaps not as much as one might think if there was a sense that Congress provided market participants with a true solution versus a shotgun compromise on the political chip every voter can relate to -- income tax rates. 

The 10-year Treasury note is down 21 ticks.  It's a notable drop, but it's not a head-for the-safe haven exit kind of move.

There is more work to be done in Washington to reduce our deficit and debt -- a lot more work.  That is a daunting thought for a variety of reasons and it is a sobering reminder to keep one's enthusiasm in check over the deal that got done, which was really only a half deal that garnered 167 "No" votes in the House of Representatives.

What It All Means 

The equity market has started the new year on a banner note, but the next few months could be fairly turbulent as fourth quarter earnings are reported and as the debate over spending cuts unfolds in public fashion.

The battle over spending cuts is setting up to be even more acrimonious than the battle over tax rates.

With that in mind, we feel compelled to reiterate our view that a blended investment strategy for the equity component of one's portfolio could make sense entering 2013. 

That is, don't overweight or underweight cyclical and countercyclical sectors exclusively. 

Maintain a balanced mix, as that will allow for participation in upside moves like the one seen today and help mitigate losses in down markets that might be seen in the near future if partisan politics takes us to the brink again of possibly defaulting on our debt, which is at $16.3 trillion and counting.

--Patrick J. O'Hare, Briefing.com

Obama and Boehner, Both Reckless Spenders

By Nick Gillespie and Veronique de Rugy - Dec 17, 2012

In negotiations over the so-called fiscal cliff, U.S. President Barack Obama is calling for $1.4 trillion in new tax revenue over the next decade.

The Republican opposition, led by House Speaker John Boehner of Ohio, has signaled that the Republicans could stomach generating as much as $800 billion in new revenue over the next decade, or half of Obama’s number.

Such a large difference obscures a more fundamental agreement: Neither side is interested in addressing the central role federal spending plays in creating persistent deficits and, more important, damping economic growth.

The deficit for fiscal 2012, which ended on Sept. 30, came in at about $1.1 trillion, marking the fourth consecutive year that the nation has posted a trillion-dollar-plus spending gap. Contrary to what Dick Cheney said when he was vice president, deficits do matter.

Under the most recent budget plans of House Republicans and Obama, the federal government will spend from $40 trillion to $47 trillion over the next decade. Yet in the current negotiations, Boehner has called for only $800 billion in spending cuts and Obama $400 billion, most of which would be pushed off until 2022 or later -- tantamount to saying they won’t happen at all. Neither side’s long-term spending plans envision a balanced budget in the next 10 years.

Reduced Growth

In a paper released this year, economists Carmen M. Reinhart, Vincent R. Reinhart and Kenneth Rogoff said that periods of debt overhang -- when accumulated gross debt exceeds 90 percent of a country’s total economic activity for five or more consecutive years -- reduce annual economic growth by more than one percentage point for decades.

Over 20 years, the authors write, there can be a “massive cumulative output loss” that reduces gains by 25 percent or more. The U.S. went over the 90 percent threshold after the 2008 financial crisis. At $16.3 trillion, our current gross federal debt represents more than 100 percent of 2012’s total economic activity or gross domestic product.

Obama hasn’t explained precisely how higher tax rates on a small fraction of the population will do much to improve the country’s balance sheet. According to the Congressional Budget Office, increasing taxes on the wealthiest Americans to Clinton- era levels will raise $220 billion over four years -- $55 billion a year on average through 2016, the last year of Obama’s presidency.

Over that same period, the White House Office of Management and Budget estimates federal spending at $15.8 trillion, or almost $4 trillion a year on average, and annual deficits of $700 billion.

A little history: 2000 was about the best year ever for federal revenue since 1950. The government raked in slightly more than $2 trillion in nominal dollars and $2.3 trillion in inflation-adjusted (fiscal year 2005) dollars. When measured as a percentage of GDP, revenue reached 20.6 percent, the highest fraction ever recorded in peacetime. Although it’s true that receipts in 2006 and 2007 topped the $2.3 trillion mark in constant 2005 dollars, those totals represent smaller fractions of GDP, 18.2 percent and 18.5 percent, respectively. So it’s fair to call the $2.3 trillion in constant dollars a high-water mark. All these figures are drawn from the 2013 Historical Tables generated by the OMB; see table 1.3.

The high level of revenue -- both in constant dollars and as a percentage of GDP -- was reached in a roaring economy. And all Americans were taxed at significantly higher levels than they are now.

Income Pyramid

Whatever you think about the decline of rates under President George W. Bush, it made the U.S. tax system more progressive by reducing the burden on middle- and lower-income people. That’s one reason that singling out high-income earners for increases this time will yield such little revenue: All of us paid higher taxes then. It wasn’t just the swells at the top of the income pyramid.

Even if government could attain the revenue levels of seven years ago, it wouldn’t come close to covering spending, which crossed the $3 trillion mark, in inflation-adjusted dollars, in 2009. Neither Republicans nor Democrats are suggesting reducing total year-over-year spending.

The OMB estimates that annual government spending from 2013 to 2016 will average $3.25 trillion in 2005 dollars, or 22.7 percent of GDP. Whether measured in constant dollars or as a percentage of the economy, the government has never once reached that level of revenue, much less sustained it for a number of years.

Given low estimates for economic growth over the coming years, any attempt to reduce the debt-to-GDP ratio before Obama leaves office will thus require significant spending cuts in the near term.

Both the president and members of Congress worry that rapid spending cuts would cause a new recession or slow down the recovery. Such fears are overstated.

In the 1990s, Canada, for instance, reduced debt-to-GDP ratios through an aggressive combination of actual, year-over- year spending cuts and higher taxes. The result wasn’t malaise but a burst in activity.

The same happened in the U.S. right after World War II. In 1944 and 1945, annual government spending (in 2005 dollars) averaged about $1 trillion and represented more than 40 percent of GDP. By 1947, it had plummeted to $345 billion in 2005 dollars and 14 percent of GDP. Even facing the demobilization of millions of soldiers, the economy soared and unemployment fell despite almost universal fears that the opposite would happen.

Such outcomes are not flukes. Research by economists Alberto F. Alesina and Silvia Ardagna underscored that fiscal adjustments achieved through spending cuts rather than tax increases are less likely to cause recessions, and, if they do, the slowdowns are mild and short-lived.

Spending Reductions

What’s more, when spending reductions are accompanied by policies such as the liberalization of trade and labor markets, they are more likely to have a positive impact on growth.

While many economists -- and certainly all politicians -- worry that turning off the spigot of public spending will shrink an economy (and anger constituents receiving the cash), the opposite is likely to be true.

In an October 2012 study published in the National Bureau of Economic Research, Alesina and Ardagna point to Canada (1993- 1997), Sweden(1993-1998) and the U.K. (1994-2000). In these cases, spending cuts had a positive effect on private investment while improving consumer and business confidence by reducing the expectation of higher taxes.

Obama said in September that he would cut $2.50 in spending for every new dollar of tax revenue -- what he has called a “balanced approach.” Yet his proposal for dealing with the fiscal cliff -- $1.4 trillion in new tax revenue and $400 billion in spending cuts -- represents a $3.50 increase in taxes for every $1 of cuts, assuming the reductions take place.

As the history of deficit-reduction frameworks (including those signed by Republican Presidents Ronald Reagan and George H.W. Bush) has shown, when immediate rate increases were “balanced” by spending cuts down the road, the spending cuts are never made.

In any case, recent experience shows that even if Obama’s 2.5-to-1 ratio of spending cuts to revenue increases came to pass by some miracle, it is far too timid. Economist David Henderson estimates that during the 1990s retrenchment in Canada, the government cut spending by $6 to $7 for every new dollar of revenue it raised.

Obama and Boehner have been largely silent on the specifics of their cuts, though both seem bent on slicing off parts of old-age entitlements such as Medicare and Social Security long after they are out of office.

The best holiday gift the president and Congress could give the country is to spend the final weeks of 2012 working on an honest plan to cut spending here and now.

(Nick Gillespie is the editor in chief of Reason.com and the co-author of “The Declaration of Independents: How Libertarian Politics Can Fix What’s Wrong with America.” Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. The opinions expressed are their own.)