Christina Romer, newly liberated from the bonds of her service as President Obama’s Chairman of the Council of Economic Advisers, has an op-ed on the urgent need for and approaches reducing the federal government’s long-term fiscal deficit:
Make no mistake: persistent large budget deficits are a significant problem. Government borrowing in good times crowds out private investment and lowers long-run growth. It can also make policy makers unable or unwilling to use adequate fiscal stimulus in times of need: concerns about the deficit limited the size of the stimulus act in 2009 and are a main reason that Congress has refused to take additional measures to cut our painfully high rate of unemployment. And our projected long-run deficits are simply unsustainable.
So, the question is not whether we need to reduce our deficit. Of course we do. The question is when.
Her strategies for reducing the deficit: enact President Obama’s proposal for allowing the tax reductions for the highest income earners enacted nearly ten years ago during the prior economic downturn and known as the “Bush tax cuts” to expire. She couples this with a tentative toe in the water for raising the Social Security retirement age.
Since I opposed the tax cuts of the early Aughts (as the wrong tax cuts), it would be odd of me to oppose their elimination now. Why not be even more aggressive? Why not tie the proposed deficit reduction to specific economic milestones, e.g. the unemployment rate falling below 8%, rather than just the vague undefined future, when things are better?
Let’s put what we need to do in deficit reduction in proportion to the scope of the task. The following chart, from the CBO, is a projection of revenues, expenditures, and deficits:
You can click on the image for a larger version.
Note that over the next ten years the deficit, based on President Obama’s budget, is anticipated to be nearly $10 trillion. The stated 20 year increase in revenues that can be realized through eliminating the tax cuts for the highest income earners would amount to roughly 6% of that. Clearly the ten year revenues would be less than that. While raising taxes on the highest income earners may be a necessary drop, it’s only just a drop in a large bucket. Even if you go by the CBO’s more modest “baseline scenario” deficit of roughly $6 trillion over ten years, it’s a small proportion.
Defense spending is a favorite target for cuts, particularly by progressives. Annual defense spending is roughly $600 billion, including the appropriations for Iraq and Afghanistan. If we were to cut that in half, something that, essentially, nobody is suggesting, it would realize roughly $3 trillion over ten years or roughly a third of the deficit. Half, if you are more inclined to believe the CBO’s baseline scenario.
Non-defense discretionary spending, i.e. everything else other than Social Security, Medicare, interest on the debt, and a few other entitlement programs, amounts to about 18% of the budget. If we were to cut that in half, too, on top of cutting the defense budget in half and the tax increase it would close the deficit and a little bit over. Can you imagine that taking place? Me, neither.
I notice that Dr. Romer doesn’t mention cutting healthcare spending. Can we narrow the budget deficit without cutting healthcare spending? I don’t think so. Not to mention the disaster that healthcare spending is wreaking on state and local government budgets.
Yes, it’s kind of disturbing how military spending and entitlement spending seem to exist in ideological cocoons, never to meet. I become more convinced everyday that the only way our elites will break out of this flawed thinking is when the solvency crisis hits. They are increasingly anachronisms, living and operating in an environment that doesn’t exist anymore.
The focus of the article is on current policy with throwaway ideas for long term solutions. Still, it is remarkable how much people avoid or do not talk about health care costs since it is the biggest factor in our long term debt. Lots of drivel about Juan Williams, DADT, mosques, etc. The next Congress, I predict, will not address it at all other than some repeal efforts.
Steve
I think that I would characterize the op-ed a little differently, Steve. I would say that while it purports to be an affirmation of the problem that long-term deficits propose it suggests nothing that would reduce those deficits and is actually a bone thrown to her former colleagues in the White House.
Well that’s SOP in Washington -a 4 step process:
1. Identify a real problem.
2. Blame most or all of the problem on political opponents.
3. Propose a solution that satisfies ideological and/or short-term political concerns that simultaneously fails to deal with the real problem.
4. Rinse, repeat.
Tano from OTB will be along shortly to speak rather sternly with you steve for that insipid comment.
Yep, but have no fear…it can’t go on forever. I’ve done projections with current GDP and health care/medicare growth rates to show that in not to far into the future 100% of GDP will go towards health care (say 64 years). Of course, we wont get to that point. Those unsustainable trends will stop well before then. So don’t worry, eventually these problems will “fix themselves”.
Oh, and I should mention it will be very, very ugly.