Deficits and Debt
Op-Ed: Put off Retirement
New York Times | November 14, 2010
Maya MacGuineas is the president of the Committee for a Responsible Federal Budget and director of the Fiscal Policy Program at the New America Foundation.
In the search for possible reforms, increasing the retirement age is a no-brainer. Doing so would help control spending in Social Security and Medicare, bring in more revenues without raising taxes and help the economy grow.
Gradually pushing up the retirement ages (currently 65 for Medicare, and 66 for Social Security — headed slowly to 67) to 68 and then indexing them to life expectancy would generate hundreds of billions in savings over the next few decades.
As we live longer, we have to work longer. Delayed retirements will protect seniors from outliving their private savings. Working longer increases the labor supply and helps economic growth, as well as increasing income tax revenues, thereby reducing the overall budgetary shortfall.
The new health care exchanges will allow seniors to purchase health care privately, so there is no longer the need for Medicare to subsidize them so early on.
We should also raise the age for early retirement age for Social Security benefits from 62. That policy signals to people that it is reasonable to stop working early, which harms the economy and increases the likelihood that seniors with those smaller benefits will fall into poverty.
This proposal is not particularly popular (few ideas that would generate large budgetary savings are.) Specific accommodations will obviously have to be made for those who cannot work longer.
But done right, raising the retirement age is one of the most defensible and sensible changes we can make.
Op-Ed: Finally, Good News On The National Debt
AOL News | November 11, 2010
It's not every day that the country receives some encouraging news on the deficit and debt front. But Wednesday just so happened to be one of those days.
The co-chairs of the White House's National Commission on Fiscal Responsibility and Reform, former White House Chief of Staff Erskine Bowles and former Sen. Alan Simpson, R-Wyo., released their own proposal for how to get the deficit and debt to manageable levels. While this proposal is not the final report of the commission, it reflects the first step in the commission's task of trying to forge a consensus among a minimum of 14 of the 18 members.
The proposal in a nutshell? Quite impressive.
With the population aging, health care costs growing faster than the economy and a seemingly ever-present imbalance between federal spending and revenues, our nation's debt is set to truly erupt in coming decades.
So how do the fiscal commission's co-chairs get us back to a sustainable course? Well, they take a hard look at every area of the budget.
On spending, the proposal cuts discretionary spending over the next few years and then limits its growth to inflation. Mandatory spending is pared back through changes to civil service and military retirement, farm subsidies and further reductions and controls on health care costs, among others. The proposal also advocates for serious reform of our outdated and inefficient tax system, calling for lower rates, fewer tax credits and exemptions, a simpler code and improved compliance.
The proposal also restores Social Security's solvency, for the sake of ensuring that the program will be there for future generations who will need to rely on it, not for the sake of deficit reduction.
Will every person agree with every proposal in the plan? Of course not. But just a brief reminder -- deficit reduction is hard. If the plan were filled with things we love, we'd be making the deficit worse, not better. This is the fiscal reality.
Reforming our fiscal path is about making our economy stronger down the road, it's about making government work more efficiently, it's about ensuring that social safety nets will still be around for the most vulnerable in society, and it's about tackling our debts before they tackle us. Most importantly, it's about keeping America's promise to bestow better opportunities to future generations.
OK, OK. So with all this praise, there's also got to be major downsides as well, right?
Well, reasonable people can disagree with some of the specific recommendations, and some may call for more spending cuts or more tax increases. But the fact remains that when viewed in its entirety, it's a giant step in the right direction.
As for all the attacks -- that's to be expected. But the co-chairs' proposal is a great starting point for an adult conversation on how to fix the budget, and we eagerly await expanding these conversations into a national discussion on how to stabilize and reduce our national debt.
Maya MacGuineas is president of the Committee for a Responsible Federal Budget.
Op-Ed: Britain's Austerity: 4 Lessons For Washington
CNN Money | October 25, 2010
Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.
The Brits sure did mean it when they promised a tough fiscal austerity plan. Man, the difference between our two governments' ability to act when necessary is depressing. It sure would be nice to have a parliamentary system at a time like this.
The U.K. coalition government last week spelled out spending reductions that average 19% across all agencies over 4 years. That's 500,000 public-sector jobs. Little is spared. Housing benefits and education funds will be cut. Defense will be pared 8%. The cuts go on.
It remains to be seen whether this aggressive plan will be enacted as outlined, and how the U.K. economy will respond. But there are already a number of lessons for Washington.
Too quick a pace for U.S.
Prime Minster David Cameron's plan is structured to aggressively reduce the deficit over the next four years.
That schedule jibes with the time span for the U.K. parliament.
But given the state of the world economy and the need to balance stimulus and deficit reduction, such a short-term timeframe is too aggressive for the United States to follow. And we are lucky that, thanks to the dollar's "safe haven" status, we don't have to follow a tight time frame.
In fact, Britain's timeline highlights a flaw in President Obama's current approach: The White House fiscal commission is laboring under the goal of trying to eliminate the primary deficit by 2015. That goal too is too shortsighted. (Deficit cutting: The first cut is the deepest)
A more sensible plan would be to set a medium-term fiscal target to be achieved over about 10 years.
In the first few years we should focus more on "fiscally responsible stimulus," while also adopting a specific deficit reduction plan that can be phased in gradually as the economy recovers.
This is not the Krugmanesque model of giving lip service to the need for future budget changes with all the emphasis on stimulus now. Instead, we need a multi-year legislative agenda that includes specific stimulative and deficit-reducing policies.
The savings should kick in when the economy is strong enough. But Congress needs to commit to budget cuts in law as quickly as possibly -- or the markets just won't believe us.
On target: Go after spending
Thumbs up to the Cameron team for its aggressive tack on spending. Past experiences show that spending cuts tend to be better than tax increases for trimming deficits while generating strong economic performance.
We'll need to take a page from Britain here. The U.K. reductions in public sector employment are a useful model -- and we should emphasize wage freezes and compensation restructuring.
And while we talk timidly about freezing spending, we will need to think in terms of cuts as well.
The British government is also right to means-test where possible. For example, its decision to scale back the universal child credit for those on the high-end of the income scale is an excellent model for many of our universal programs, including Social Security and Medicare.
Footnote: Refreshingly, the Brits show none of the foolishness we do about promising to make changes without touching taxes. Their model suggests a sensible sequence: Cut spending first, then raise taxes as needed to close the remaining gap.
Tax pitfalls
I argue over and over that tax increases will have to be part of the budget solution. Still, I share many of the fears of the anti-tax crowd: A value-added consumption tax could become a money machine and temporary taxes will inevitably be made permanent.
And, yup, these fears are borne out in the Britain austerity plan.
Once a VAT is in place, the rates keep getting ratcheted up, as the Brits are doing now. If we do end up with a consumption tax in this country, we need to find a way not to turn it into an AMT.
Similarly, there's a good lesson for Congress in the Brits' plan to make their temporary bank tax permanent.
I support a temporary consumption tax to help with stimulus and close the fiscal gap. (Beware the VAT: Why the consumption tax is possible)
But any temporary tax needs to hit a broad swath of taxpayers so there's a big constituency rooting for its demise as soon as the fiscal ship is righted.
U.S. lawmakers need to focus on the big picture: Systemic budget reforms and a fundamental restructuring of the tax system.
Dramatically reducing tax expenditures and reforming the corporate tax code would serve as an excellent first step in enhancing efficiency and competitiveness while increasing revenues.
Political courage: If only ...
Finally, Cameron has shown real leadership in indicating that fixing the budget situation is worth risking losing office over. He is right. Would that a politician or two here in Washington be willing to show that kind of courage.
Op-Ed: How To Avoid A Debt Doomsday
CNN Money | October 17, 2010
Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.
Here is a scary question: What could trigger a full-blown fiscal crisis in the United States?
OK, now breathe. It is not at all clear that we will have one. There is the highly desirable possibility that policymakers will act preemptively and gradually phase in major entitlement reforms, spending cuts and tax reform.
You know the old Winston Churchill saying that Americans can always be depended on to do the right thing -- after exhausting all other alternatives. Well, there's still time.
And then there is the scenario one step removed from a full crisis: a Japan-style "lost decade" situation in which the economy muddles along. Job growth is lackluster for an extended period. Low interest rates allow Washington to keep borrowing. And the country gets stuck in an ineffective borrow and stimulate cycle with little to show for it other than more debt.
If that muddle-along scenario is the frog in the boiling water, then a full-blown fiscal crisis is the frog hopping along the interstate until he abruptly becomes road kill.
A fiscal crisis would not be pretty. Creditors could lose faith and pull their money from the United States. Interest rates would spike, causing interest payments to grow. The government would be forced to borrow more, which would push rates even higher. The endgame would be a vicious debt spiral and another recession.
Yes, rates are now extremely low. But that's because, as one of my colleagues likes to say, "We are the best looking horse in the glue factory." It's not because anyone looks at our economy as the next great investment story. Because of that, things could change on a dime. (Take the CNNMoney debt quiz.)
What could trigger a worst-case scenario? Even if it's not likely to happen anytime soon, it's important to understand the possibilities.
Sovereign debt contagion: We have already seen how quickly markets can turn against overly indebted countries. While the United States is not likely to become Greece in the immediate future, the parallels are too similar for comfort.
The fact is debt investors eventually grow intolerant of countries that don't have plans to improve their fiscal condition.
And markets may eventually turn against the United States. If that happens, the situation could deteriorate very quickly. No money manager will want to be the last one invested in a place from which other investors are pulling their capital.
Ticking time bombs in the budget: The government runs all sorts of potentially risky and costly programs.
The Pension Benefit Guarantee Corp., Fannie Mae and Freddie Mac and the Federal Deposit Insurance Corp. are some examples. These agencies embody trillions of dollars in government obligations, and the full extent of the exposure is not well-known.
The dramatic deterioration in the balance sheet of any of these institutions could lead to a chain of events where markets conclude that the government is not as sound as they had previously believed.
The White House's fiscal commission: President Obama has shifted the responsibility for coming up with a deficit reduction plan to his bipartisan commission.
But there is no guarantee that Congress will do anything other than glance at the commission's recommendations and tuck them away. This could be the confirmation that U.S.-debt watchers fear -- that the political system is incapable of dealing with the country's fiscal challenges.
As the chairman of Standard & Poor's sovereign rating committee recently warned, it is critical that policymakers consider the recommendations of the commission or it could jeopardize our AAA credit rating.
The states: If the fiscal situation is bad at the federal level, it's even worse for many states. A state or even a local government attempting to default on its legal obligations could be enough to roil credit markets.
Just a few years back it would have been hard to imagine that talk of a full-blown U.S. fiscal crisis would be anything other than fear mongering. Now, however, these scenarios are starting to feel alarmingly possible. Let's hope Churchill was right.
Op-Ed: Dear Congress: Don't Blow It On Bush Tax Cuts
CNN Money | October 12, 2010
Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.
Ahem. Excuse me, Congress? I don't mean to nag, but there are 58 more working days until the Bush tax cuts expire. Trust me, I get it: I always waited to cram until the night before the test. Still, shouldn't you get a move on?
I know there are a lot of possible combinations of tax extensions floating around. To help move things along, here are a number of options, ranked in order from best to worst.
Bingo! Fundamental tax reform
By far the best option would be an overhaul of the tax code.
No one needs to be convinced that our current system is a mess. It is outdated, overly complex, a drag on economic growth, and as leaky as an old fisherman's dingy.
There is really nothing to love there.
Reforms with the most potential:
- close many of the more than $1 trillion in loopholes that permeate the code;
- modernize the corporate income tax so we don't stifle business with one of the highest marginal tax rates in the world;
- shift away from taxing income toward taxing consumption;
- and replace some of our less desirable taxes such as the payroll tax with a broad-based energy tax.
This will take some fortitude. For example, those "loopholes" include things we all love like the home mortgage interest deduction or the tax break for state and local taxes, not just pernicious corporate welfare which is so easy to oppose.
And even though Sens. Judd Gregg and Ron Wyden have a bipartisan bill that could serve as a solid starting point, and former President Bush's tax commission issued a report chock full of good ideas, getting this done in 58 days is a tall order. This one may have to come later.
Next best: Let cuts expire but enact temporary stimulus
The economic argument for keeping the tax cuts in place, even in the face of immense fiscal pressures, is that now is not the time to pull so much liquidity out of the economy.
True. However, these tax cuts are not particularly stimulative.
A better option would be to let all the tax cuts expire, but use the money they would have cost over the next two years for more targeted and effective stimulus measures -- such as unemployment benefits, aid to states, a payroll tax cut, business incentives or more help for the weakest sectors such as housing.
All told, such an approach would cost roughly $350 billion over the next two years, but save almost $3 trillion over the decade. And, importantly, it would surely do at least twice as much good for the economy.
Hold your nose: Temporary extension
The political compromise many are leaning toward is extending some or all of the tax cuts temporarily and then deciding what to do.
Yes, punt.
This approach could be useful if it came with an ironclad commitment not to extend the tax cuts again without combining them with a full-fledged budget reform deal or a pledge to offset their costs.
Of course, the risk is that they just become another Alternative Minimum Tax patch or Medicare "doc fix." These supposedly "temporary" budget maneuvers actually cause budget mayhem year after year as policymakers enact last-minute extensions with no budgetary offsets.
In terms of particulars, extending the tax cuts only for those making less than $250,000 is preferable to extending them all, and would save around $100 billion over two years. (I refuse to call this the middle class, because really, since when did the 98% percentile become the middle class?)
A one-year extension is too short if we want to get even some stimulative effect, but if they end up being extended for all income levels, it's worth staggering them so that tax cuts for the wealthiest expire after one year and the rest do after two or three years.
Don't fall for it: Extend cuts temporarily for all making less than $1 million
This is one of those compromises that makes you want to say, "just stop already." It's the kind of slippery slope policymaking that happens too often in Washington. Soon we'll be hearing about extending all the tax cuts except specifically those for Bill Gates and Warren Buffett.
For sure, we need to address the country's growing income inequality problem. The tax code and spending side of the budget should be more progressive. But we can't just lump all the responsibility for paying taxes on a few hedge-fund types. The government needs more revenue, and everyone has to be part of the solution.
No! No! No! Permanent extension
Don't do it. We can't afford it. It will make climbing out of the fiscal hole we are in nearly impossible.
It is absurd that there's even a debate. Extending all of the Bush tax cuts will add $3.7 trillion to the debt, and extending them for those making less than $250,000 a year will add $3 trillion.
So what will Congress do? My bet is on a two-year temporary extension for all of the tax cuts -- or maybe three years to get us through the next election.
But hope springs eternal: I am not giving up on fundamental reform.
