Deficits and Debt
CRFB has compiled a brief background on the scope of our nation's fiscal challenges and the drivers of our debt and deficits, while outlining some of the types of solutions available to address the problems. This Powerpoint is meant to offer an objective, non-partisan view of our country's fiscal situation as an educational tool meant to help foster open and honest debate about these issues.
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.
CRFB's policy paper America's Fiscal Choices at a Crossroad looks at the human side of the fiscal crisis. It examines the two choices we face in addressing our nation's fiscal problems - action or inaction - and how both of those choices could affect a variety of different groups within our society.
Along with the release of this analysis, CRFB hosted a "Voices of America" video contest where participants proposed their own ideas for controlling our growing public debt.