Deficits and Debt
RealClearMarkets | April 24, 2012
We have already absorbed more campaigning from the Republican contenders than most people can stand. We have also seen President Obama, and friends, fire back when his programs were under attack in the Republican primaries. From all sides we have heard sound-bites, catch-phrases, and answers to questions never asked.
Sad to say, it's only going to get worse. You can run from the presidential campaigning, but you can't hide.
There will be more than enough money for general election spending to saturate TV and radio airwaves with political advertising. All of it will be loud. Much of it will be negative. Little of it will have to do with major problems which ought to be discussed by the candidates. In keeping with their managers' instructions, candidates will try to stay "on message" and "off-issue."
The fall debates will be better than the primary debates if only because there will be two candidates rather than 10. But the debates, if they follow precedents, are not likely to shed much light on the problems that really concern people.
Not since 1992 when Ross Perot asked us to "peek under the hood" have Americans been given much of a chance to hear about the long-term, persistent debt and deficit problems of the U.S. During the 8 year Clinton presidency which followed, we enjoyed 4 consecutive no-deficit years. Good fortune may have been partially responsible for that black-ink, but it was achieved in a period when control of the government was divided between the parties just as it is today.
The 2012 candidates, President Obama and Governor Romney, have now been identified. Each has had plenty of time to look under the hood for a careful study of the U.S. debt/deficit problem. So far, their proposals fall well short of the target supported by many budget analysts of stabilizing the debt at about 60% over the next decade.
Both candidates can improve their platforms on fiscal and budget issues, and both probably will. Even so, in an aggressive, noisy campaign, the public may not fully understand the candidates' positions. After all, precision and clarity have never been the hallmarks of presidential campaign advertising.
The incumbent Democrat has eschewed the high standards of his own Debt Commission (Bowles-Simpson) Report, and instead has proposed small tax increases and small spending cuts. The challenging Republican has promised tax cuts aplenty, but his overall economic plan needs clarification, especially since he endorsed the rigorous expense-cutting of the Paul Ryan Budget Plan.
The American people deserve a full debate and discussion on our fiscal problems. With four $1 trillion deficits in row and a debt ratio over 70%, the Washington response of both political parties has been to "kick the can down the road." Kicking the can is political-speak for saddling future generations with this generation's refusal to meet its own obligations.
Full debate for presidential candidates has come to mean the officially blessed TV debates, which began in 1960. These debates, and the questioners, are often justly criticized. Nevertheless, the TV debates remain the best way to probe the candidates' positions on the difficult issues. In contrast to the loud advertising wars of candidates and super-PACS, the debates are the public's best information source.
Because the fiscal problem is so important, the public interest would be well served if at least one of the fall debates were reserved for discussion of the debt, the deficit, and the budget. But, to ensure that the public is fully informed, searching questions should phrased by experienced, bi-partisan budget experts, and put to the candidates, as often as necessary, by skilled questioners.
Candidates can be as evasive as they wish, but slippery answers will be as revealing as bad answers, especially if the question is posed more than once.
The general idea is to guarantee, insofar as possible, that the candidates respond directly to unpleasant questions about the country's dire financial condition. Candidates love to talk about more tax cuts, and about preserving entitlements. That's easy. The hard part is telling the people about the difficult decisions that must be made so that future generations will not be subjected to slow growth, high interest rates and a lower standard of living.
A request has already been made that at least one of the presidential TV debates be reserved for a thorough discussion of the fiscal problem. Whether it will be granted is not yet known. There ought to be strong public support for it.
Many Americans know that we are now living on borrowed money from foreigners. They know that one rating service has already downgraded our debt, and that others may shortly follow. They know low interest rates won't last. They know about our recurring deficits that are always supposed to decline, but never do. Those Americans ought to be demanding at least one Fiscal Debate.
The Hill | April 17, 2012
It is fitting, and perhaps ironic, that today is both Tax Day and Financial Literacy Day. Taxes and finances are intimately intertwined, and as the U.S. budget crisis underscores, that relationship is not always a positive one. Today, as our elected leaders ask households around the country to take a look at their own balance sheets, they might be wise to do the same. What they will find isn’t pretty — a ledger filled with a mountain of debt and no real long-term plan to bring spending and revenues more closely in line.
Having already grown from its historical average of below 40 percent of the economy to about 70 percent today, the nation’s debt is on course to rise to 85 percent of the economy by 2022, and 150 percent by 2040. By contrast, federal revenues have historically been at about 18 percent of the economy. It doesn’t take a financial literacy class to know that if you owe eight times as much as you earn, you are probably in trouble.
The consequences of continuing to accumulate this debt are substantial. Higher government debt means slower economic growth as investors will buy U.S. Treasuries instead of investing in new, more productive business ventures. It means that an increasing share of our tax dollars will go to paying interest on our debt instead of important investments for the future and social programs. It means that the government will have less flexibility to respond to future crises — whether they are economic, military or natural disasters. And it means that, eventually, global markets will get fed up and no longer trust that the United States will pay back its debt. At that point, we’ll have a serious crisis on our hands, and instead of making gradual reforms on our own time we’ll be forced to make abrupt spending cuts and tax increases — and they won’t be pretty.
Time is running short to bring the country’s finances in order. If we don’t choose to address rising debt in a smart way now, there is a set of policies scheduled to occur at the end of the year that will — at least temporarily — solve it automatically for us, but in a manner that is not in the best interests of the country. As a result of the temporary extension of the 2001/2003 tax cuts at the end of 2010, the failure of the congressional supercommittee at the end of 2011 and the payroll tax holiday renewed in February of 2012, and other expiring provisions, a series of deficit-reduction policies are scheduled to hit all at once at the very beginning of 2013. Described by Federal Reserve Chairman Ben Bernanke as a “fiscal cliff,” these policies would put in place the eventual magnitude of savings we need — but their timing and composition could wreak havoc on the economy in the short term and would do little to improve our long-term growth prospects.
The two largest components of this fiscal cliff are the expiration of all of the 2001/2003/2010 tax cuts — which means higher rates and higher taxes for everyone — and an across-the-board spending “sequester” that would immediately cut defense spending by 10 percent and non-defense programs across the board by 8 percent.
Do we need more revenue and more spending cuts? Absolutely. But the revenue should come from comprehensive tax reform that lowers rather than raises marginal tax rates and that reduces the deficit by cutting the various deductions, exclusions and credits, which are really just spending in the tax code. And the spending reductions should be focused on cutting wasteful and anti-growth spending and controlling the growth of entitlement costs — not mindless wholesale cuts that hit good spending as well as bad.
Before year’s end, lawmakers must replace the prospect of a fiscal cliff with a set of smart reforms throughout the federal budget to gradually put debt on a stable and downward path. Done right, such a plan would not only avoid the dangers of abrupt tax and spending changes but also reprioritize revenues and spending toward what Americans care about most — a pro-growth budget and tax code that invests in the members of the next generation rather than borrowing from them.
Changes set to occur at the end of the year offer an incredible opportunity for our leaders to act proactively and replace the automatic and abrupt savings with smart reforms. We must not let the moment pass us by.