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Idea Lab

DLC | E-newsletter | December 2, 2010
The Financial Future

Yesterday's report by Fiscal Commission Co-Chairs Erskine Bowles and Alan Simpson -- "Moment of Truth" -- is a 66-page document filled with ideas and numbers touching almost all aspects of American public and private life. They will, if implemented, affect everything from our armed services, family driving habits, incentives for laboratory research and support for child care. But the most important of them are at the very beginning. By 2020, the report observes -- as today's kindergarteners are starting high school -- the government's debt will rise to $20 trillion. Interest payments will consume nearly $1 trillion in government spending annually -- one tax dollar in every six, up from this year's one in 17. The national fiscal deficit will be about 5 percent of GDP. This figure equals the 20th-century peacetime deficit peaks of the New Deal and Reagan eras, and is more dangerous as it reflects not an unusual and emergency condition, but a permanent structural gap between revenue and spending.

This is the consequence of some bad fiscal choices over the past decade, but also of objective facts: the acceleration of baby-boom retirement, the slowing growth of the work force, and the steady beat of health inflation all mean we have more retirees, their support will cost more, and we'll have fewer workers to pay for it. If this gap stays open indefinitely, it will eventually lead to a financial crisis like those which have engulfed Greece and Ireland this year; and of course an event on that scale in the United States would threaten a global upheaval dwarfing that of 2008.

To head off such a disaster, the Commission offers a comprehensive plan, combining tax reform, spending cuts, some reshaping of entitlements, and a long-term proposal to stabilize Social Security. It shares sacrifice broadly, and extends it to areas often insulated from budget debates -- notably military budgets, farm subsidies and retirement programs. We're pleased to see that some of the ideas are on the DLC's wish-list: permanent "pay-as-you-go" rules for new spending and tax cuts; limits on farm subsidies; lower tax rates offset by fewer tax expenditures; cut-and-invest approaches to support the most important programs; more rational business taxation; and the abolition of earmarking. We also note some ideas that are cause for concern, such as sharp limits on mortgage interest and research tax deductions. But as we consider the whole package the Commission makes the appropriate point: if you don't like one option, suggest another that works just as well.

Taken as a whole, this is a credible plan that would work. By 2015, it would cut deficits from last year's $1.3 trillion and 9.9 percent of GDP to $440 billion or 2.4 percent of GDP, with the drop beginning in 2012 to allow for economic recovery. Then, by 2020, deficits would descend to about 1.5 percent of GDP and stay there, stabilizing national debt at about 60 percent of GDP. In more specific terms, the plan's major features include:

  • Spending cuts of $1.7 trillion by 2020, including both security and non-defense discretionary accounts, which would bring spending back to 2008 levels then allowing growth at 1 percent annually through 2020. Examples range from a base-closing commission-style approach to reducing weapons procurement through a 10 percent reduction in the federal civilian workforce achieved through attrition and cutting vehicle-fleet budgets for federal agencies.

  • Tax reform, based on a broader tax base and lower individual and corporate tax rates. This would bypass the current argument over Bush-era tax rates by creating a different approach altogether. For businesses, it would mean abolishing all business credits and deductions, and in exchange cutting business tax rates from 35 percent to 28 percent and moving to more widely used "territorial" system of international taxation. For individuals, it means lower tax rates but fewer deductions, including sharply scaling back the large middle-class tax benefits for mortgage interest payments and health benefits.

  • Entitlement reform to save $700 billion in this decade and much more after 2020, through new savings in Medicaid and Medicare, the two programs which together account for almost half the growth in government spending over the next decade; and through cuts in smaller but equally strongly-defended farm subsidies, too. Separately, the plan envisions raising the retirement age for Social Security to 68 by 2050 and to 69 by 2075.

  • Growth: Finally, the plan also features cut-and-invest ideas to bolster some of the federal public services most important to growth, such as investment in basic scientific research. Also important, it will guarantee a higher level of infrastructure investment, financed through a 15-cent increase in the national gasoline tax.

A lot of ideas -- and some will cause discomfort. The mortgage-interest deduction, for example, takes occasional editorial-board fire as a middle-class benefit, but is an important underpinning of home ownership, in its turn a foundation of safe neighborhoods, savings, and family stability. On the business side, the research and development tax credit is an effective way to keep America's private-sector R&D well above those of other countries -- and therefore to keep the U.S. economy at the leading edge of science and technology. Civilian pay raises, including for non-combatants, are important to the services' ability to attract and keep the best mechanics, cargo pilots, and other support staff essential to the services' missions.

But some discomfort is inevitable if we are to avert the crisis looming ahead. The report vividly shows the bankruptcy of the "no-new-taxes" and "no-entitlement-cut" orthodoxies of right and left which dominated the last decade's fiscal debates -- or more accurately, the bankruptcy toward which these orthodoxies are leading the country. As the Co-Chairs' draft moves toward a Commission vote this week and a national debate on our fiscal future, there is room to reshape individual proposals, or to cancel them and replace them with other options. But as they say in the report -- in the "Becerra Rule" eponymously proposed by Commissioner Xavier Becerra (D-CA) -- don't shoot down an idea without offering a better idea in its place.

In releasing this draft the Co-Chairs do the country a service. If we do not act on the scale it suggests, today's kindergarteners will graduate from high school into a country in crisis. If we do, we can head this crisis off and give them the country they deserve. Bowles and Simpson, a moderate Democrat and a mainstream Republican, have earned the public's gratitude. We congratulate them and look forward to the debate.


From the Commission, the Co-Chairs' outline:

Ed Gresser's testimony to the Commission on the fiscal future, June 2010:

The Congressional Budget Office's most recent Budget and Economic Outlook:

And from the White House's Office of Management and Budget, spending/revenue data and projections: