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10 Themes Emerging from the New Debt Reduction Plans

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In recent weeks, a number of plans have been released, recommending specific policies to deal with our fiscal challenges and to bring our debt back down to sustainable levels. In this paper, CRFB compares the six major reform plans and analyzes the common themes that are emerging in discussions over fiscal reform.

Op-Ed: Stop Whining About Bowles-Simpson. Let's Make It Better

CNN Money | November 15, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

The draft plan released last week by the co-chairmen of President Obama's fiscal commission started an important conversation.

The plan would cut defense and domestic discretionary spending, end most tax breaks while lowering rates and reduce health care spending. It would make Social Security solvent by raising the retirement age, lowering benefits on the upper end and raising taxes. It would also increase the gas tax.

All are good ideas. Guess what? The critics are circling.
"It a travesty, outrageous, DOA." Or, "You must be kidding: We said, NO new taxes."
"You would do what? Raise the Social Security retirement age?"
Never mind that the retirement age would go up one year by 2050, and two years by 2075 with a hardship exemption for many workers.
The attacks on the plan are completely predictable -- and utterly frustrating.
Did people really think fixing the national debt problem would be easy? In fact, if the plan had been greeted with approving "ooohs" and "aaahs," that would have been a sure sign it was not up to the job.
I think the plan is not only an excellent starting point but an excellent ending point as well.
But for their ideas to be viable, Erskine Bowles and Alan Simpson should make their proposal more appealing to all sides.
Make the budget plan part of a comprehensive economic recovery plan: One of the loudest criticisms of the plan is that it would send us back into a recession.
Au contraire -- putting a legitimate debt reduction plan in place and phasing it in gradually is one of the most important components of helping the recovery to stick.
But Bowles and Simpson should add immediate fiscal stimulus. For instance, they could call for Congress to give money to the struggling states in return for an overhaul of pension and health systems. Another idea: an immediate payroll tax cut in return for a gradual increase in the early retirement age.
Fix Social Security and improve retirement security: The plan would fix Social Security but does nothing to help our national savings problems.
Instead of raising payroll taxes for Social Security, which their plan would do over time, they should phase in some of the spending reductions more quickly. Their plan could use new revenues to build mandatory, add-on savings accounts that would sit on top of Social Security, providing all retirees with diversified benefits and helping to increase national saving. (Social Security - Take the quiz)
Tax better and tax fairly: The co-chair plan has great ideas for fundamental tax reform by broadening the base and lowering rates. But it doesn't go far enough to recognize the disturbing growth in income inequality.
In return for keeping government spending down and thus taxes under control, they should make the overall tax system more progressive.
Rather than aiming to bring the top income tax rate down to 24%, the plan should keep the top rates where they are and plow more savings into tax relief at the lower end and in the business sector to help consumers and the private sector drive the economic recovery.
Make it stick: Stronger reforms of the budget process should be part of a fiscal plan so it doesn't go off of the rails after the first year or two. Bowles and Simpson should include a specific target: Reduce the debt to a set level by a set date. If lawmakers miss, spending would be automatically cut and taxes raised.
They should also include spending caps and automatic triggers on the programs that most threaten the budget such as health care, Social Security and tax breaks.
Don't water it down: It will be tempting to make the plan more agreeable by doing less. Don't take the deal.
The Bowles-Simpson plan will not fix all the nation's fiscal problems. For instance, it doesn't balance the budget until 2037. But it will go a long way, and reassure credit markets in so doing.
Watering down the plan might not calm markets for long. No sense going through all this pain just to have to do it again in a few more years.
Now is the time: Maybe both sides think they can do better than this deal so they'd rather wait it out.
But if conservatives dig in their heels on not raising taxes, we will likely hit a fiscal wall first and be forced by markets to make large changes abruptly. That's a scenario to be avoided: The only option then would be a large add-on value added tax, which will undoubtedly turn into a dreaded money machine as rates get pushed up year after year.
Rejecting relatively small tax increases now increases the probability of very large ones later.
On the left, the risk of waiting is that Congress will be forced to dramatically scale back the safety net for the neediest. Reducing benefits now for the more well off in Social Security, health care and other areas of the budget allows us to stick to the principle of protecting those who most depend on the programs.
Waiting makes that harder to do.

Congress and the president will have to come up with something both sides can agree on. There are certainly changes that could help make a budget plan more amenable to the left and the right. But the opening bid by Bowles and Simpson is an awfully good start. Let the negotiations begin


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: Dear Speaker Boehner

CNN Money | November 3, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Welcome to the job! Uh, I think. Of course, Republicans must be thrilled to have taken back the House and all.

But let's get real, at times like these, being in charge isn't all that fun. And if you do it right, it will be really tough. So assuming you don't want to call for a recount ...

My advice comes from someone terribly worried about the fiscal direction of the country. I don't care which party holds the majority. Consult your political advisers for the other side of what I am about to suggest. (The deficit debate: Game on)

Fixing the economy: We are in real bind here. The truth is that things probably won't get all that much better anytime soon.

So when it comes to talking about where we are headed, don't over-promise: Manage expectations.


After years of overspending at the household level, and decades of overpromising at the government level, we have a lot of digging out to do. At the same time, the economy continues to face many vulnerable spots. A nuanced response is in order.

In the short run, the economy needs more stimulus. Sorry, I know that word doesn't travel well in your circles, so call it what you want. Business investment. A downpayment on growth. Innovation policy. Whatever.

GDP is well below potential and something will have to fill the gap.

Focusing on incentives to promote business spending and investment would probably dovetail best with your agenda.

But while stimulus spending is politically desirable because it comes from borrowed money -- so, for instance, you get to cut taxes without offsetting the costs -- that borrowing must only be temporary. This is not an excuse for permanent, deficit-financed tax cuts.

Speaking of which, I realize I'm not going to convince anybody to stop pushing to make the Bush tax cuts permanent, but just between friends, we all know that these tax cuts are not the best way to stimulate the economy, nor are they the centerpiece of any real effort at fundamental reform in the longer run.

If you do proceed with making some or all of the tax cuts permanent, it will only make fixing the deficit and debt problem all the more difficult. And you can't fix the economy if you don't fix the debt problem.

That brings us to controlling government spending.

Reforming spending for real: No question about it --government spending is projected to grow out of control. As soon as the economic recovery takes hold, the focus has to be on bringing spending back down to more manageable levels.

Unfortunately, the solutions offered on the campaign trail won't do it. The heart of the problem is entitlement spending, and the Pledge to America only mentions entitlements twice. TWICE. Come on now. I fear you will have a tough time fixing government spending if you are scared to even discuss it.

Paul Ryan, your colleague from Wisconsin, has been a real hero on this topic, laying out his ideas for long-term entitlement reform. But one of the most frustrating things during the election was watching members of both parties run away from these ideas without introducing alternatives of their own.

If politicians are too scared to talk about how to fix Social Security, Medicare, and Medicaid, we are truly headed for trouble. It is time to drop the focus on things like earmarks and repealing TARP and focus on where the real money is.

I know, I know, no new taxes. But how? I have no problem with the concept of not raising taxes. I personally prefer a smaller government (though I'd make it more progressive, especially on the spending side.) But if you don't want to raise taxes, and you don't want to march us towards a nasty fiscal crisis, I am hard pressed to see how you get there.

I, along with a colleague, Bill Galston from the Brookings Institution, offered a plan to fix the budget over the next decade by first going after spending and then filling in the gap by raising revenue. Let me just say, the more specific you get, the harder it gets to find those savings.

We need a plan on how to go after spending. But until someone develops a viable one, it is just irresponsible to take taxes off the table.

Time to get specific: You have made a number of courageous and important comments recently. You suggested that we should be open to raising the retirement age, reforming tax expenditures, and only temporarily extending the tax cuts. We need more of this kind of honesty and specificity.

As I see it, the two most likely scenarios are absolute fiscal gridlock and showdowns early next year when Congress has to prepare a 2012 budget and raise the debt ceiling. (While I have you: You should tie an increase in the ceiling to agreement on a reasonable debt reduction plan.)

By the way, this will end badly when financial markets turn against us, which they certainly will if we don't put a long-term plan in place.

The good news is there's an alternative: We could be pursue bipartisan cooperation and put in place a reasonable budget plan that is phased in gradually. It would involve freezing discretionary spending, including defense, reforming Social Security, slowing the rise in health care costs and dramatically reducing tax expenditures.

Voters are ready for it. They want the national budget fixed. They said it loud and clear during the election.

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. 
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