TIME | March 17, 2011
It's rare that those of us concerned about the nation's fiscal course come bearing good news. The federal debt, after all, is as high as it has ever been in the post-1945 period and is growing uncontrollably. Under our best projections, the debt will grow from nearly 65% of gross domestic product today to over 90% by the end of the decade — a level that experts have warned could have dangerous economic consequences.
Yet while our fiscal challenges are large and growing, they are not insurmountable. The National Commission on Fiscal Responsibility and Reform, on which I served as associate director, has shown a way forward. Its recommendations offer proof that broad bipartisan support for deficit reduction — based on the principle of shared sacrifice — is possible. Yes, the population is aging, which means Social Security and Medicare costs will rise. And yes, health care costs continue to grow faster than the economy, putting upward pressure on federal health spending. But we can address these challenges. Our problems are not fundamentally economic; they are political.
See how collaborative consumption will change the world.) The politics of pain makes deficit reduction a difficult task, of course. More worried about the next election than about the next generation, politicians prefer to avoid or defer decisions that increase people's taxes or cut their benefits and services.
Making things worse, pledges of what not to do — raise taxes, meddle with Social Security, cut defense spending — are pervasive in Washington. The more pieces of the budget that policymakers take off the table, the harder it is to bring debt under control.
And yet the fiscal commission overcame these odds. The plan would cut $1.7 trillion in discretionary spending — both defense and nondefense — while protecting, and in some cases increasing, spending on education, infrastructure and high-value R&D. It would cut $600 billion in mandatory spending, especially by reducing health care costs and reforming federal pensions, while protecting programs for the poor and disadvantaged. It would reform the tax code in a way that reduces or eliminates various tax breaks in order to drastically cut tax rates while helping generate nearly $1 trillion in new revenue. And it would make the Social Security system solvent for the next 75 years and beyond through a combination of progressive changes to the benefit formula, a gradual increase in the retirement age and an increase in the amount of income subject to the payroll tax, among other measures.
In total, the fiscal commission's recommendations would reduce the deficit by $3.9 trillion through 2020, bring annual deficits to manageable levels of 1% to 2% of GDP (compared with 10% this year) and put the debt on a downward path after 2013.
The recommendations prove that we can enact policies to bring the debt under control and do so without cutting spending or increasing taxes in a way that hurts low-income individuals or stifles investment and growth. Far more important, the commission showed that such a plan can garner support from across the political spectrum. The plan received the support of 11 out of 18 commissioners, a bipartisan super majority that comprised five Democrats, five Republicans and one independent. The fiscal commission demonstrated emphatically that the parties can work together, in the spirit of principled compromise, to get our fiscal house in order.
Unfortunately, the President's budget this year failed to include most of the commission's recommendations, and House Republicans have thus far focused too narrowly on cuts in domestic discretionary spending. But neither party has ruled out the adoption of the recommendations. As tough votes on this year's budget and a debt-ceiling increase come up, a comprehensive deficit-reduction plan may be the only way to avoid stalemate.
On our commission, we actually found that the "go big" approach helped garner more votes, not fewer. Republicans were willing to cut defense spending, but only if nondefense spending (including entitlements) was also cut. Democrats were willing to accept substantial spending cuts, but only if accompanied by significant new revenues. If President Obama and the leadership of both chambers of Congress — and both parties — are willing to enter into serious negotiations to solve our fiscal problems, there is no doubt that they can reach agreement. Everyone will have to give up something. After all, the solutions are painful. But in the process, everyone can get something in return: a better future.
CNN Money | March 21, 2011
I think we a can find a way to get a large-scale budget agreement that tackles our insane multi-trillion dollar debt in time to avert a fiscal crisis. I am not saying we will definitely get it done. But I do think, even in the current hostile partisan environment, that it's becoming increasingly possible.
And as a long-time pessimist and deficit worrier, this new feeling -- this glimmer-of-hope-feeling -- is a whole new sensation. I kind of like it.
Here is how it could happen.
Cut, cut and cut: First, we have to cut domestic discretionary spending. A lot. More than I ever dreamed. And far more than my comfort zone would have ever allowed.
While the discussion in the House right now is not nearly broad enough to get the job done, it is a serious effort and a necessary first step. Congress must stop assuming that just because something has been in the budget for years, it should never be reconsidered.
We are going to spend more on the elderly and health care (more on this below) and, thus, we will have to spend less on other things. The House freshmen have broadened the nation's mind about how much we can actually cut.
This is not about crafting a plan that tinkers here and there, and cuts out some of the waste. No. We will have to pick a goal that once seemed ridiculous: cut $800 billion from this part of the budget over the next decade. Programs will have to be ended. Government workers will have to find different jobs.
Defense can't be spared: Next, we have to cut defense. A lot. If you want to look for waste, look in the defense budget.
"Defense entitlements," such as extremely generous health and retirement benefits, are eating up the security budget and need to be trimmed. And real decisions have to be made about our role in the world.
Yes, entitlements too: The big money will come from entitlements. Both parties remain too cautious.
In order to preserve important priorities in the budget, we have to let go of the old-fashioned model of universal benefits that provide more for the well off than those who need benefits the most. This is a particularly tough sell for Democrats who believe universality is the key to ongoing support for programs like Social Security and Medicare.
But without structural changes, we won't get the budget under control. And for those who think we can address the entitlement programs by gradually raising taxes to European levels, the voters have spoken: It's not going to happen.
We need revenue: While Scandinavian tax rates are not in our future, revenue has to go up. Here's why: You could make all of the above changes, and we will not be anywhere near to closing the budget gap.
The president's fiscal commission, which saved $4 trillion over a decade, should be seen as the bare minimum of what needs to be done. I can promise you that no policymaker will put forth a credible budget to save that much without new revenues. So we have to get real.
The question is not if taxes will go up; it is how. The answer should be in ways that are smart and good for the economy. Ending tax breaks and switching to a consumption or carbon tax would be the right way to go.
How to make it happen: The politics are hard, but not insurmountable. Each side will need something. The trick is to find "sweeteners" that won't blow up the rest of the deal.
On the left, the public investments agenda needs to be incorporated into these reforms. Public investments have been shortchanged for decades. A multi-billion dollar fund that directed capital investments for economic (not political) reasons into R&D and infrastructure makes sense.
Secondly, we should recognize that the disturbing trends in income inequality are a national problem. While we can't fix the nation's massive fiscal problems by only taxing the rich, millionaire and billionaire surtaxes make sense as one piece of more fundamental tax reforms.
On the right, we need to find more ways to get out of the way of businesses. Reducing corporate tax rates, pulling back on excessive regulations and understanding that business is the centerpiece of the American economy are essential to driving growth.
Secondly, many on the right have a valid concern that revenue increases will be used to fund new government spending and not to bring down the debt. As a fix, the budget deal could be paired with a legal spending cap.
Run, don't walk: Oh, by the way, did I forget to say that we need to pass this deal this year? Well, we do.
Hey, no one ever promised this would be easy, but things are happening. The country cares about these problems and policymakers are taking them seriously. Something tells me, we just might succeed.
CNN Money | February 28, 2011
President Obama's budget was such a tremendous letdown and a massive punt, I have to wonder if part of the White House's calculation was: "Don't worry, people will forget about the budget in no time." It makes me want to start every column for the rest of the year with: "The president's budget was such a tremendous letdown and a massive punt ... "
However, the details are out there. So I will spend my energy focusing on Republican spending proposals and what they might -- and might not -- lead to. (Please note that I reserve the right to return to the topic of how Obama's budget was such a tremendous letdown and a massive punt.)
The House Republicans' effort to cut $60 billion from the non-security discretionary portion of the budget is helpful for reasons they would and would not have anticipated. It is also mistargeted and likely to backfire.
First, the good: For years, there's been plenty of talk about the need for fiscal responsibility. But that's all it has been: Talk.
The talk has gone like this: Deficits = bad. Responsible budgeting = good. Yes, yes, yes and then ... a flurry of new spending increases and tax cuts. So much for fiscal responsibility.
Now, it is pretty much certain that Congress, after a bloody fight and maybe even a government shutdown, will make some real cuts in the non-security piece of the budget.
I would have delayed these cuts for another year and made some different choices. The policy challenge the past few years has been about the delicate dance between stimulating the economy and starting to bring the debt down without derailing the recovery. My preference would have been to wait another year to start slowly phasing in real cuts.
Still, in the grand scheme of things, the Republicans are doing something important here. They are actually cutting spending, not just talking about it or slowing the growth of it. This will turn out to be a defining moment in starting to move the budget back in the black.
But when it comes to fixing the budget, the GOP effort won't work. The best this approach can achieve -- the best -- is probably a quarter of the savings we need to bring the national debt back down to a manageable level. Forget balancing the budget. You can't fix a massive multi-trillion dollar problem by focusing on one-eighth of the budget. You just can't.
So that brings us to entitlement reform. No one has been willing to go first. The president's budget (did I mention it was a tremendous letdown and a massive punt?) is virtually silent on any meaningful reforms to Medicare, Medicaid and Social Security. Without addressing those, the budget will never be fixed.
Last year, Republicans left entitlement reform out of their Pledge to America and stooped to an absurd low when promising not to cut Medicare. But Medicare will have to be cut. Politicians will have to get real and offer up significant structural reforms to the major entitlement programs; otherwise they will have to decimate the domestic discretionary portion of the budget and still run us into a fiscal wall.
Maybe this exercise will make it absolutely clear that all the hard work of budget cutting will be for naught unless politicians turn their attention to reforming our unsustainable entitlement programs. That would be a productive outcome of what is currently a frustratingly mistargeted discussion about cutting a very small sliver of the budget.
But if we don't make that change soon, I predict these aggressive cuts will backfire on the House Republicans. The cuts will only make voters realize that they actually like some of the programs the government funds. It will be bitter medicine for voters to swallow if Congress cuts those programs and still doesn't fix the budget.
Fixing the budget will be tough policy, tough politics and tough negotiations. The only way to make the heavy lift worth it is if we actually succeed -- if we actually fix the budget.
Maybe, just maybe, the lesson of this exercise will be the recognition that we have to expand the reforms to all areas of the budget. It's not enough to make really tough choices without getting a healthy budget in return.
Think of it this way: It's the reward of losing weight that makes dieting worth it. Those failed diets? Not so fun.
CNN Money | February 14, 2011
President Obama is right when he says that public investments need to be a central part of the nation's economic growth and innovation strategy. Perennial short-termism has left the investment area of the budget dangerously under funded.
Unless we change course with well-targeted investments in human capital, infrastructure and basic R&D, our economy will be left at a severe disadvantage down the (crumbling) road.
Republicans are also right that keeping taxes low and creating a business-friendly environment is necessary to avoid harming competitiveness. In a world of global competition and mobility, ratcheting up tax rates is a losing strategy.
Well, that was easy. All we have to do is spend more on investments and keep taxes low.
But there's one big problem: We deficit hawks are also right that the mammoth debt levels we face will certainly cause a slow burn on the U.S. economy and standard of living -- if not lead to an outright fiscal crisis, if we don't change course.
In order for these three objectives -- investment, low taxes and fiscal responsibility -- to coexist, we need a major restructuring of the nation's budget.
Unfortunately, we did not see that in the president's budget on Monday.
In recent years, we have layered on major new spending programs -- think health care reform, homeland security or the prescription drug program. But we continue to counterbalance them with tepid fiscal planning.
The temporary freezes in mostly the smallest parts of the budget, as President Obama is proposing, and the lip-service to the need for "reforms" do not meet the standard of dramatic anything. Sorry to say, they meet the standard of a punt.
The country needs a fiscal turnaround plan.
The good news is that the fiscal pressures facing the country are starting to force the national discussion away from policies that would enlarge the deficit. I predict, for example, that the $850 billion budget busting tax "compromise" hatched in December will be the last of its kind for some time.
Republicans are starting to suggest specific spending cuts and a bipartisan group in the Senate is poised to introduce the full set of recommendations from the fiscal commission. Adding to the deficit finally seems to be going out of style.
But a turnaround plan doesn't just mean getting the numbers in the budget to add up -- which is hard enough in itself. It requires a fundamental rethinking of national priorities and how we raise and spend our money.
Can we rip away some of our entrenched budget habits in order to create the space for a more appropriate budget for this century's economic challenges and opportunities? Certainly it would require touching many of the budgetary third rails, but the payoff would make it well worth it.
The main change needs to be rethinking entitlements, the programs that operate without a budget and basically on auto-pilot. They are the fiscal elephant in the room.
In a time of limited resources, why spend money on Social Security providing larger benefits for the well-off than for those who depend on the program, or more for retired ladies who lunch than the single working moms?
A true means test for Social Security benefits would free up hundreds of billions of dollars for more investment and deficit reduction. In health care, we need a real budget -- vouchers or another form of rationing and a strict means test.
Bottom line: treating social insurance more like real insurance would free up a tremendous amount of resources to close the fiscal gap, keep taxes low and spend more on needed investments. Oh, and about the purely outdated entitlements like agriculture subsidies? Just end them already!
On the tax side, while it is important how much we tax, it is also important how we tax. The income tax punishes work; the payroll tax is regressive; the corporate tax harms our ability to compete; and the $1 trillion-plus in tax expenditures allow politicians to create a mammoth budget mess by using the tax code to "spend." One could hardly create a worse starting point.
An entirely new tax system, such as a progressive consumption tax, would meet many of the needs of our new fiscal and economic realities.
Such a tax would levy progressive rates on what you spend instead of what you earn and could reward work and savings.
But it could also ask more of the well-off, who, given the tremendous and disturbing growth in income inequality, need to be asked to shoulder more without dampening their incentives to work, build business and provide jobs. Again though, this will require a lot more than just tinkering at the margins.
This isn't the type of thinking you get in the normal budget process. We certainly didn't see it from President Obama's budget on Monday.
But it is true that out of every crisis comes an opportunity. Well, we are on the verge of a fiscal crisis if changes are not made. It is indeed the moment to turn this into an opportunity for a major rethinking of our national priorities and how we budget for them.
CNN Money | February 8, 2011
Anyone looking for serious fiscal leadership from President Obama in his State of the Union Address could have been nothing but disappointed.
He had the right narrative: jobs, investment, competitiveness and fiscal responsibility. But when it came to leadership on actually fixing the fiscal situation -- the hard part, as opposed to soft and fluffy wordsmithing -- there was none to be found.
The president failed to lay out specifics for how to tackle the country's massive debt overload. He even failed to embrace the proposal by his own fiscal commission -- even as a first step to jumpstart the conversation.
I don't want to be too hard on the president. In my heart of hearts, I believe he cares deeply about this issue. I believe he is worried about the damaging effects to the economy and our standard of living of large deficits and debt.
And I believe he has picked serious, thoughtful people to lead his economic team. They have had to take on a series of thankless tasks: navigating an imploding banking system, creating jobs in a jobless recovery and, now, fixing the massive budget disaster not of their own making.
Furthermore, I will grant you that he probably would not have gotten a standing ovation from Congress if he had displayed the kind of leadership I was hoping for.
Imagine ... "Yes, we will fix Social Security by reducing benefits and raising the retirement age; yes, we will bring down health care costs through greater cost-sharing, rationing, and a real health care budget; yes, defense and other discretionary spending will have to not just be frozen but cut; and, yes, revenues will have to go up. Yes we can!"
Right. We all know what kind of reaction that would have gotten.
But enough with the excuses.
Last year, the White House argued it couldn't get specific in its 2011 budget because the political climate wouldn't allow it. Any real proposals, such as entitlement cuts or broad-based tax increases, would have been attacked so viciously that they would have actually set back the cause. That was the argument.
Now a year has gone by, and the debt has increased by nearly $2 trillion. That's $2,000,000,000,000 or, in layman's terms, a whole helluva lot of money. The December tax deal just added another $850 billion to the tab.
Yet, I fear that we are heading to the same old warmed-over excuses for why this year's budget won't be a serious one: "We can't set forth a serious plan if House Republicans won't work with us." Or "The voters aren't ready."
I don't know whether administration officials will use another magic asterisk, budget gimmicks galore or rosy economic assumptions, but I doubt they will be offering a serious budget that improves the fiscal path.
So what then?
President Obama is still the only one who can use the bully pulpit to set the stage for these tough policy choices and bring all the parties to the table. Here is what he should do.
Set a fiscal target: The first step should be setting a target, such as bringing the debt down to 60% of GDP by 2020, or balancing the budget by 2025.
The president should make it a national objective. It's not as sexy as going to the moon, but certainly, it's no less important. Republicans can hardly object, owing to their support for the recent flurry of proposals for a balanced budget amendment. They may even want to balance the budget sooner.
Make the target law: The next step should be to write the fiscal target into law.
The law should include a "budget hammer" -- triggers to make sure the target is met. Then, if Congress didn't meet the target, across-the-board spending cuts and an automatic surtax would kick in. That should get Congress moving.
Get into the details: Yes, the president will have to offer specifics sooner or later. But so too will Congress, a process that will get started with their upcoming budgets.
If Obama doesn't want to use his commission report as a starting point (note, however, that he should) he can draw up his own plan. But realistically, he will have to let go of his "no new taxes on people making less than $250,000" mantra. He'll also have to find more savings in health care, make changes to Social Security other than just raising the payroll tax on the rich and look for real cuts in discretionary spending.
Hold a budget retreat: Finally, the president should host an honest negotiating session to work out the needed compromises between the various approaches. One former member of Congress suggests they work seven days a week, with no breaks for fundraising, to come up with a plan.
If the president doesn't use his upcoming budget to get specific, at the very least he needs to find a way to force the discussion with everyone at the table.