America is at a fiscal crossroads. In the last six
years, the Bush administration has turned a
budget surplus projected to be $5 trillion
over 10 years into a deficit projected
to be more than $2.8 trillion. It
would be one thing if all this new debt was being racked up
to finance smart public investments designed to expand economic
opportunity for the middle class. But the surplus has
instead been squandered on tax cuts for the wealthiest slice
of American society, and on a wasteful governmental spending
spree.
Some of the least defensible expenditures in that spending
spree have been well publicized -- egregious pork-barrel projects,
midnight earmarks, and the like -- but the profligacy has
actually gone well beyond that. Among many other things, the
administration has frittered away taxpayers' money by building
up a massive new shadow government of private contractors
that is now four times the size of the career civil service.
What ever happened to fiscal responsibility?
The president claims that his 2008
budget proposal will return the government's
books to balance in five
years. But there is no reason to believe
him. In six previous attempts, his
administration has consistently failed
to submit a budget that holds water. In
keeping with that pattern, the administration's
latest effort is full of rosy
economic scenarios and strategic
spending omissions. It doesn't take full
account of the real costs of the war on
terror, for example, or the cost of
reforming the Alternative Minimum
Tax (AMT), which nearly everyone
agrees is essential.
In 2004, the Progressive Policy
Institute issued a deficit-cutting proposal,
"A Return to Fiscal Responsibility." It
predicted that if the country's fiscal policies
were not changed, "the coming
decade is likely to rank as the most fiscally
irresponsible in our nation's history."
Unfortunately, that statement has
turned out to be all too prescient. With
two years still to go, the first decade of
the 21st century has already set a new
record for the most debt generated in a
10-year period. This fiscal recklessness
represents an economic albatross for the
country and an abdication of
Washington's responsibility to the citizens
and taxpayers it represents. But
now, with Democrats in control of
Congress, the time is ripe for a renewed
effort to restore discipline. PPI will soon
release an updated version of its budget
proposal, titled "A Return to Fiscal
Discipline II" (available at ppionline.org).
It is outlined here and presented graphically.
Do deficits really matter? The economic
rationale for restoring fiscal discipline
today is different from what it
was during the Clinton administration.
Then, cutting the enormous
deficits left over from the Reagan era
and balancing the budget were rightly
seen as integral to economic growth.
Reducing government borrowing kept
long-term interest rates down, which
unleashed new private investment and
spurred record-breaking growth.
But global capital markets have
grown much larger today. An abundance
of ready lenders with relatively
cheap capital has made it easier for the
Bush administration to run large budget
deficits without driving up long-term
interest rates. As a result, many
Republicans -- and some liberals --
have stopped worrying about fiscal
discipline and learned to love deficit
spending.
But they are wrong. A balanced
budget may no longer be as potent a
stimulant to growth as it was in the
1990s, but as University of Chicago
and PPI economist Austan Goolsbee
argues, deficits still matter. In fact, the
big Bush deficits amount to a triple
whammy: They place an unfair financial
burden on future generations, they
weaken the government's ability to
respond to national crises, and they
expose America to the whims of foreign
lenders and central banks.
Conversely, whittling the Bush deficits
down to manageable proportions
would provide a national insurance
policy against global financial shocks
and reduce the leverage that foreign
lenders exercise over America's economic
health. (See "Why Deficits Still
Matter," forthcoming at ppionline.org.)
Yet while the economic consequences
of deficit financing have
changed somewhat, the political and
moral cases for fiscal discipline have
not. Spending taxpayers' money with
wisdom and restraint remains an
important marker of political responsibility
and accountability. According to
a recent Democracy Corps poll, 75 percent
of voters believe government's lack
of accountability in how it spends
money is a serious problem. Today, just
as in the early 1990s, it's up to the
Democrats to restore fiscal sanity in
Washington and thereby rebuild public
confidence in progressive government.
Eventually, the federal budget must
return to a period of sustained surpluses
that will allow the country to begin
paying off its national debt. But it took
the Bush Republicans six years to dig
America into a deep fiscal hole, and it
will take some time to climb back out
again. In the near term, it may make
sense, as Goolsbee has suggested, to run
small deficits -- on the order of 1 percent
of gross domestic product
(GDP), instead of the 3 percent or
4 percent of recent years.
The new PPI plan summarized
here shows how. It provides a
detailed blueprint for reducing
the Bush deficits by $1.88 trillion
over the next 10 years. It includes
a hit list of spending cuts, steps to
restore budget discipline, and tax
reform proposals that will point
the way back toward progressivity
and fairness.
Tough choices. Fortunately, the
newly elected Democratic leaders
of the House and Senate have
already made fiscal restraint and
budget reform cornerstones of their
agenda. The steps they have taken
so far are laudable, including the
House of Representatives' vote to
restore pay-as-you-go budget rules,
known as "Paygo." But if Congress
is to succeed in reining in the
deficit and returning the country to
fiscal sanity, it will have to make
many more tough choices over the
coming year and beyond.
Even if Democrats can hold
the line on new tax breaks and
entitlements, structural deficits
will remain and the national debt
will grow. Last year brought
greater revenues than years past,
yet more than $500 billion was
added to the public debt. Looking
ahead, the picture only gets
worse. Factoring in realistic projections
for war costs and AMT reform,
the country's total debt will rise to
approximately $11.6 trillion by
2011 -- roughly double the level when
President Bush took
office.
Why the big disconnect
between the size of
the deficit and the increase
in the debt? Because
Social Security and Medicare
trust funds, which are in temporary
surplus, are being used to pay other
bills. This makes the annual deficit
look lower than it really is.
Unfortunately, with the baby
boom generation heading into retirement,
the current fiscal policy of raiding
the Social Security and Medicare
trust funds could not be happening at
a worse time. Economists project that
Social Security will become insolvent
by 2041, and the number of beneficiaries
will climb to 82 million people
by 2050. Medicare faces even bigger
problems. If health care costs continue
to rise at the current pace, the
Medicare shortfall will be seven times
the projected Social Security shortfall.
By 2050, based on the current
trend lines, the federal government
will spend more than 20 percent of
the U.S. GDP on Medicare and
Medicaid alone -- and that would be
equal to today's total government
spending.
The longer Congress waits to correct
the fiscal damage wrought in the last six
years, the more painful the budget
choices will be. For example, according
to the Government Accountability
Office, if the deficits aren't reined in
now, then by 2024 Social Security,
Medicare, Medicaid, and net interest on
the national debt will consume all revenues
collected from taxes. A year later,
net interest on the debt will exceed
Medicare expenditures, and the
public debt itself will exceed the
country's GDP. By 2035, net interest
on the debt will exceed
Medicare and Medicaid expenditures,
and the debt will be twice the
size of the GDP.
What to cut. Unfortunately, there
is no silver bullet to solve all of
these deep fiscal woes. Instead,
lawmakers must tackle the causes
most responsible for the structural
deficits: the proliferation of special-
interest tax breaks and loopholes;
the collapse of the budget
rules and accountability measures
put into place in the early 1990s;
the explosion of pork and wasteful
spending; uncontrolled growth in
entitlement spending; and the
fatally flawed Bush tax cuts.
The plan outlined here is a
progressive alternative to the
borrow-and-spend policies of
the Bush administration. It
achieves budget savings in five
major areas:
First, there are cuts in the size
of the government, including
proposals to eliminate unnecessary
programs, slash the number
of private sector consultants on
the federal payroll, and reduce
the federal government's travel
budget.
Second, a slew of government
reinvention proposals would consolidate
programs and agencies, cut
costs, and increase efficiencies.
Third is a group of budget reform
measures. The most important of
these would create a commission to
reduce corporate welfare expenditures,
including tax breaks and
spending programs that aid companies
that do not need or deserve government
subsidies.
Fourth, the plan also recommends
restoring strong budget controls,
including a stronger version of Paygo,
discretionary budget caps, and a constitutionally
viable version of the lineitem
veto.
Finally, there are more than a dozen
proposals to reform the tax code. They
would help restore fairness and progressivity
to the code by rolling back
the Bush tax cuts for the super rich
while still ensuring continued tax
relief for middle- and low-income
families.
The table on page 32 lists all 53 proposals
in the PPI plan. Together, they
would cut the 10-year projected deficit
by $1.88 trillion. (For a detailed
description of each proposal, see the
full-length report at ppionline.org.)
Depending on whether one uses the
Congressional Budget Office's budget
baseline estimate or a more realistic one
that includes, among other things, the
cost of reforming the AMT and the true
price tag of the war on terror, the savings
could reach more than $2 trillion.
Moreover, depending on how much
deficit reduction is achieved, additional
savings would come from reductions in
net interest payments on the national
debt.
Because the policies of the last six
years have sunk the country so
deeply into debt, this plan will not
balance the budget by itself. But it
will put America back on the road to
fiscal responsibility without wreaking
havoc on the economy; it will enable
the country to deal more effectively
with the coming retirement of the
baby boom generation; and it will
make government more efficient and
responsive.
