America's long-term economic health is at a crossroads. For the last three years, the Bush administration has run up a huge tab by enacting excessive tax breaks for the wealthiest Americans and the largest corporations, while increasing federal spending to levels not seen since World War II. The 7.6 percent average annual growth in the federal budget in 2002 and 2003 is more than double the 3.4 percent average between 1993 and 2001 under President Clinton. As a result, the surpluses of the 1990s have turned overnight into the largest deficits in history. The deficit is now estimated to be $477 billion in 2004, and the national debt is expected to double 10 years from now.
The Bush administration and the Republican congressional leadership have tried to hide the true costs of these deficits with accounting gimmickry and budget tricks. But the real story about America's deficit crisis is coming to light. In October 2003, at the request of centrists in the House of Representatives, the Congressional Budget Office (CBO) offered a realistic assessment of the federal budget, projecting more than $4 trillion in total deficits during the next 10 years -- $2.7 trillion more than the Bush administration had projected. More recently, no less an authority than Federal Reserve Chairman Alan Greenspan cited the soaring federal deficit as a potentially dangerous problem that must be addressed soon, if we are to avoid "serious longer-term fiscal difficulties."
Yet, even as the fiscal future of our government dramatically deteriorates, public perception of the seriousness of the problem is lagging. According to one recent poll, only 3 percent of voters listed the deficit as the most important issue facing the country. And Republicans in the administration and Congress, who for decades called for balanced budgets, are now arguing that deficits aren't really important.
But deficits and the nation's rising debt do matter. If we do not address the structural deficits put into place by the Bush administration and the Republican Congress soon, American families will pay more in federal, state, and local taxes, higher mortgage and credit card rates, and higher fees on student loans.
The country desperately needs a progressive alternative to the administration's borrow-and-spend policies -- an alternative that does not revert to the tax-and-spend policies of the pre-Clinton Democratic Party. Such an alternative is outlined in "A Return to Fiscal Responsibility: A Progressive Plan to Slash the Deficit," released in February by the Progressive Policy Institute. The PPI plan includes a list of 55 politically feasible and sound public policy proposals (see list PDF format) that would slash by nearly $2 trillion the 10-year deficit projected by CBO. Among the proposals are a series of spending cuts, government reinvention ideas, budget reforms, and tax reforms that would spread the pain of deficit reduction fairly. These savings are achieved in five major areas:
- Cutting the size of the government work force -- both employees and consultants -- and reducing administrative costs.
- Reinventing key government programs and agencies, and consolidating duplicative ones.
- Rolling back the Bush tax giveaways to the wealthiest Americans while protecting the tax cuts for middle- and low-income families.
- Creating a commission to reduce corporate welfare expenditures, including both tax breaks and spending programs for companies that don't need or deserve the government subsidies.
- Restoring real budget controls, including stronger pay-as-you-go (PAYGO) rules and budget caps, as well as a constitutionally viable version of the line-item veto.
Because the Bush administration and the Republican Congress have put us so deeply into debt, this plan will not balance the budget by itself. But it is a start. If implemented, it will put America back on the road to fiscal responsibility, while not wreaking havoc with our economy. It will enable us to deal more effectively with the coming retirement of the baby-boom generation. And it will make government more efficient and responsive.
The Budget Outlook
When George Bush took office, the CBO projected budget surpluses into the foreseeable future. The federal government was expected to generate more than $5 trillion in surpluses -- enough to eliminate the publicly held federal debt by 2008. That meant federal interest payments on the debt, which were running about $200 billion a year when Bush arrived, were expected to dwindle to virtually nothing by the end of this decade.
Yet within three years, our fiscal situation has deteriorated to the point of catastrophe.
In October 2003, the CBO issued a new long-term budget forecast. This realistic outlook, unlike the Bush administration's projection, assumes that all of the recent Republican tax cuts will be permanent, that Congress will continue to fix the Alternative Minimum Tax (AMT), and that the conflict and reconstruction in Iraq will not disappear like magic. It concludes that America cannot simply grow its way out of debt by boosting economic output and thus reaping a windfall in tax revenue. The country, in fact, faces a long-term, structural deficit of historic proportions.
Under this realistic budget scenario, the nation's public debt will double in the next 10 years, to $8.4 trillion -- even using the optimistic growth figures in the administration's budget. Furthermore, the deficit, rather than disappearing as the president has asserted, will remain over $400 billion for years to come, including a record $477 billion in red ink in the current fiscal year.
If these projections are borne out, the next 10 years are likely to rank as the most fiscally irresponsible in our nation's history. Even assuming the economy fully recovers and the costs of the war on terrorism decline more than most experts project, the federal government is on track to run sustained deficits equal to about 3.4 percent of the size of the economy. With only one exception (during the Reagan era), the federal government has never run deficits of this size, except during times of global depression or full-scale war.
Unfortunately, this budget deficit is not a self-correcting problem. The CBO conclusion that we cannot grow our way out of it has been corroborated in reports by government agencies such as the General Accounting Office and nonpartisan groups such as the Brookings Institution, the Concord Coalition, and Centrists.Org.
In fact, even if gross domestic product (GDP) growth averages 4 percent a year throughout the next decade (a 10-year growth rate that has not been achieved since the 1960s), the budget will remain in deficit.
It is often hard to grasp the enormous numbers associated with the current Bush administration's borrowing binges. We are facing annual federal budget deficits of one-half of $1 trillion. Few Americans ever have to deal with "trillions" of anything, so hearing such numbers may make the mind freeze. But if one breaks down the impact of deficits and the national debt on individuals and families, the dangers of our current fiscal recklessness become easier to understand.
The Bush Tax on Families
One way to express the cost of the deficit is to calculate the financial liability each of us must shoulder as a result of Washington's excess. According to Citizens for Tax Justice (CTJ), once the impact of the Bush tax cuts is fully phased in, the burden will amount to a tax bill of $52,000 for each family of four.
In fact, if current policies continue, interest on the public debt will rise to become larger than any of the entitlements in the U.S. budget -- Social Security, Medicare, or Medicaid. Interest now accounts for about 1.5 percent of GDP, down from a recent high of 3.3 percent in 1991. The decline was due in large part to the successful budget-cutting efforts of the Clinton-Gore administration in the 1990s and the budget reforms enacted by the first President Bush and the Democratic Congress in 1991. But the situation has changed dramatically. Interest is now projected to grow from today's 1.5 percent of GDP to a staggering 8 percent by 2030 -- an obscene burden to force on our children and grandchildren.
According to the Bush administration's rhetoric, Americans will get back, through tax cuts, most of the debt they have acquired. But that's nonsense. According to CTJ, the net negative impact of new public debt, minus tax cuts, amounts to $37,826 per family. And Bush's tax cuts are disproportionately targeted to high earners. So a typical middle-class family in the middle 20 percent of income distribution gets hit with a net bill of $42,400 through 2007. Furthermore, as the federal government continues to shift the burden for the environment, education, homeland security, and other governmental functions to the states and localities, state and property taxes will continue to rise. Many Americans are already paying more in state and local taxes and fees as a direct result of the debt-funded Bush tax cuts. But it is the long-term bill that is the real killer. Because we can't afford the Bush tax cuts, future generations will bear the burden of our deficits.
The End of Progressive Government?
If the federal deficits are not addressed, then progressive government will grind to a halt. Some libertarian conservatives may rejoice at the thought of government permanently shutting down many of its operations, particularly those aimed at promoting social welfare. But they should be chastened by the fact that when interest on the debt is the biggest expenditure in the budget, we will not be able to afford a war on terror, or a war on drugs, because we will owe too much to foreign creditors. In that future, government will have to cut every basic service or raise taxes by almost 30 percent in order to meet interest payments.
That scenario may sound preposterous, but it is not.
The Federal Reserve's aggressively low interest rates have kept federal interest outlays in check for now. But after fiscal 2005, interest payments are expected to rise rapidly -- to $350 billion a year by the beginning of the next decade if we continue on our present course. By 2009, the government is likely to be spending more on interest on the debt than on any domestic discretionary program -- whether education, the environment, law enforcement, science, transportation, or veterans affairs.
How will we pay for this ever-growing interest burden? The politically easy answer will be simply to borrow more. But at some point, the nation's ability to take on additional debt will become economically untenable, even for the U.S. Treasury. So at some date in the future, the government will have to balance its books. This will of course require raising taxes, or cutting spending -- or both. But by how much?
Recently, three groups tried to answer that question. The Committee for Economic Development (a group of business and education leaders), the Center on Budget and Policy Priorities (a liberal-leaning research and advocacy group), and the Concord Coalition (a bipartisan organization focused on sound fiscal policy) found that if we continue to ignore our growing deficits, balancing the budget by 2013 will require raising individual and corporate income taxes by 27 percent, cutting Social Security by 60 percent, cutting defense by 73 percent, or cutting all programs -- except defense, homeland security, Social Security, and Medicare -- by 40 percent.
Unfortunately, the problem will only get worse after 2013, when a large percentage of the baby boom generation will be retiring and our country will be faced with $25 trillion in unfunded entitlement obligations.
Higher Interest Rates
The Bush administration wishes it were otherwise, but most of the world's top fiscal and economic experts -- including Harvard's Martin Feldstein, Greenspan, and his predecessor as Federal Reserve chairman, Paul Volker -- have all written that long-term deficits cause interest rates to rise. Brookings Institution economists Peter Orszag and William Gale reviewed the literature and found that 16 of 17 academic studies showed a strong correlation between projected deficits and long-term interest rates.
Higher interest rates, of course, have a huge impact on family budgets. An increase in long-term interest rates of more than 2 percentage points, for example, would not only seriously discourage new business investment and reduce the value of the stock market, it would also mean a $3,000 increase in annual payments for a family holding a 30-year, $200,000 mortgage.
Long-Term Damage to the Economy
Clearly, the current deficit spending path, embarked on by the Bush administration and the Republican Congress, has had some stimulating impact on the economy, but at what long-term economic cost? Many economists and well-respected financiers believe the untenable budget situation is threatening the future of our economy. For example, as the global economy recovers, U.S. deficits could cause a rise in inflation or a rapid decline in the value of the dollar.
Furthermore, even if shortfalls in U.S. savings are offset by increased capital inflows from overseas investors, the proceeds of those foreign investments will have to be repaid in the future, with capital income flowing out of the United States instead of to domestic investors. In fact, the International Monetary Fund (IMF) recently released an alarming report concluding that the United States is racking up so much foreign debt that it is threatening the global economy. The IMF report warns that U.S. net financial obligations could rise to 40 percent of the country's total economy within a few years, an unprecedented level of debt for an industrial nation.
"Politics as Usual" in Washington
We are spending more today than we did three years ago for a reason: Politicians have given free range to special interests. Wasteful and unnecessary spending has been attached to legislation of national importance, such as the defense and homeland security appropriations bills -- at a cost of hundreds of billions of dollars to the American taxpayer. More than 7,000 earmarks were added to the last omnibus spending bill enacted by Congress. They included such things as $100,000 for street furniture and sidewalks in Laverne, Ala.
The relationship between pork-barrel spending, special-interest influence, and higher deficits is an unhealthy cycle that can only be broken by strong political will and leadership at the top. Unfortunately, there is a short supply of both in Washington.
Putting Future Retirees at Risk
In the late 1990s, members of both parties supported the idea that we should save surpluses to meet the baby-boom retirement challenge without passing on the burden to the next generation. A key component of this generational responsibility movement was to adopt policies that increase savings and spur long-term economic productivity, so that a smaller number of workers will be able to support a larger number of future retirees without oppressive tax increases or spending cuts. Another idea was to make sure funds are available to finance the transition costs required to reform Social Security.
Unfortunately, we have lost the bipartisan support for saving Social Security and Medicare, and have instead adopted consumption-oriented policies that will force huge financial sacrifices onto our children and their children.
How bad will it be? After the baby boomers start to retire in 2008, the combination of demographic pressures and rising health care costs will result in the costs of Medicare, Medicaid, and Social Security growing faster than the economy. The Concord Coalition has projected that by the time today's newborns are 40 years old, the cost of these three programs as a percentage of the economy will have more than doubled -- from 8.5 percent of GDP to more than 17 percent. Combined, we are handing our children a $25 trillion unfunded liability.
So what needs to be done? The obvious answer is to immediately put into place a credible deficit reduction plan. With the economy already partially in recovery, and with the Federal Reserve committed to low-interest rates over the short term, we no longer need the stimulus of excessive spending.
It is difficult to say what is an appropriate amount of deficit reduction. But considering we have shifted from approximately $5 trillion in projected surpluses to $4 trillion in projected deficits within a period of three years, it is more than reasonable to assume we could cut the current projected deficit in half over the next 10 years -- as long as the savings are focused on the right areas of the budget.
The right way to find savings in the budget is to focus on the problems that have contributed the most to the deficit:
- Government work force and administrative expenses.
- Pork and wasteful spending.
- Unnecessary tax cuts for the wealthiest Americans.
- The proliferation of tax breaks for corporations and special interests.
- Weak budget rules and accountability measures.
The table on p. 16-17 lists 55 different budget savings that, combined with net
interest savings, would reduce the 10-year projected deficit by $1.85 trillion.
The savings achieved would be almost equally divided among spending cuts, government
reinvention, budget reforms, and tax reforms. Specifically, the savings are
broken down as follows:
| Spending Cuts |
$164.855 billion |
| Government Reinvention |
$156.786 billion |
| Budget Reform |
$481.7 billion |
| Tax Reform |
$641.3 billion |
| Net Savings |
$417 billion |
| Total Savings |
$1.861 trillion |
The spending cuts are targeted heavily toward streamlining government operations. The tax reforms would only affect the wealthiest 2 percent of Americans and close corporate loopholes for those companies that are not paying their fair share. And the government reinvention initiatives are aimed at getting greater results for each tax dollar spent.
America has a choice. We can take responsibility now for our excessive spending and tax giveaways, or we can pass that responsibility onto our children and their children. This list of suggested cutbacks and reorganization of funds is a step in the right direction, but it is only a start. Due to the severity of this issue, we must begin somewhere. But if we are to finish the job, we will have to tighten our belts even further and challenge our leaders to be courageous.
Blueprint Keywords: Extra Budget Reform
