Radical Centrist EconomicsPosted: August 4, 2011
Fiscal Reform From the Radical Center
October 20, 2010
It’s crazy, I know, but imagine that U.S. political leaders after the midterm election called a truce in the partisan tong wars to work out a compromise solution to the nation’s fiscal dilemmas. The result would probably look a lot like a new fiscal reform blueprinted rawn up by two canny policy veterans, Bill Galston and Maya MacGuineas.
In The Future Is Now: A Balanced Plan to Stabilize Public Debt and Promote Economic Growth, Galston and MacGuineas map a radically centrist course to fiscal discipline that demands equal sacrifice from the left and the right, and that doesn’t impede economic recovery. Here’s hoping that President Obama’s deficit commission, which is groping for a politically feasible formula for fiscal restraint, will give this plan a close look.
Reducing America’s swollen deficits and debts is fast becoming an urgent national priority. Since President Obama took office, we’ve added three trillion dollars to the public debt, largely thanks to emergency spending to rescue the banking system and goose a faltering economy. But it’s the zooming growth of health care and retirement spending that really threatens to drown the federal government in debt. For decades, we’ve ignored warnings about the growing funding gaps in Medicare, Medicaid, and Social Security, but with the first wave of baby boomers now reaching retirement age, the future really is now.
We’ve dug ourselves more than a hole – it’s a canyon. So any talk now about balancing the federal budget is pure fantasy. The best we can hope for is to arrest the runaway growth of public debt and bring it back down to a sustainable level.
The administration’s forecasts show public debt, 40 percent of GDP two years ago, rising to more than 100 percent in 2012. The Galston-MacGuineas plan would bring that down to 60 percent of economic output by the end of this decade. It also would slash annual budget deficits from a projected five-to-six percent to around one percent, ensuring that our debts don’t grow faster than the economy.
Inevitably, the plan envisions a 50-50 split between spending reductions and tax hikes. It’s hard to image any other way forward considering liberal resistance to spending cuts, especially for the big entitlements that are driving our long-term debt problem, and the conservative allergy to tax increases of any kind. The hacking and lifting, however, would be phased in gradually to give the economy room to breathe and recover.
More specifically, the plan would:
- Make sizeable cuts in defense spending, and impose a war surtax should our current conflicts extend beyond mid-decade.
- Freeze discretionary spending for three years, such that increases in spending in one area would have to be made up by cuts elsewhere.
- Modernize Social Security by indexing the retirement age to longevity, and trimming benefits for affluent retirees in the future. It would also raise the minimum benefit, strengthening the program’s anti-poverty effect, cut the payroll tax and add a new, mandatory savings account.
- Supplement the cost-containment features of President Obama’s comprehensive health plan, by raising Medicare premiums, reducing subsidies and adding tort reform.
- Prune tax expenditures (which cost more than one trillion dollars a year) by 10 percent and limit their future growth. The proceeds would go to lower tax rates and deficit reduction.
- Enact a carbon tax, both to “buy down” the payroll tax and cut deficits.
Many of these proposals, of course, are deemed politically radioactive now, even if they are familiar fixtures on the wish lists of serious fiscal hawks. So why should we expect a package stuffed with political non-starters to advance?
Because the habit of evading even modestly tough choices has allowed the debt problem to reach such ginormous proportions that it can’t be solved in any other way, say Galston and MacGuineas. And if it isn’t solved, it will slow down U.S. economic growth, transfer our wealth to overseas creditors, and limit the federal budget’s fiscal capacity to respond to future emergencies.
The big question is: what impact will the midterm election have on the politics of fiscal evasion? Republicans say cutting taxes is the way to shrink government, but showed little stomach for cutting spending when they were in office. Result: huge public debts. Some Democrats believe deficits should be closed mostly by tax hikes, but aren’t really willing to propose them. Result: huge public debts.
As the Galston-MacGuineas plan shows, solving our fiscal problems doesn’t have to be a political zero sum game. The question is whether our political leaders can rediscover the lost arts of compromise and risk-sharing to advance vital national goals.