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November 15, 2010

Cutting the Deficit – Just Do It!

Congress doesn't have to pay any attention at all to the report of the Deficit Commission, even when it's presented in its final form on December 1 and even assuming it gets the requisite approval of 14 of the 18 commission members. The original plan was to require an up or down vote by Congress, no amendments. That plan was in a Senate bill, which failed when six Republican co-sponsors changed their minds and voted against the bill. That was a big mistake and a lost opportunity. The Commission as it exists now was established by an executive order. The President doesn't have the authority to force the Congress to vote on anything.

This draft deficit reduction plan can't be put into place incrementally just as you can't cross a canyon in two halfway leaps. Getting rid of over a trillion dollars of tax loopholes needs to be linked with nearly halving the tax rates in order to have any chance of passage and to mitigate the effect on those who had counted on the tax breaks. For example, it's hard to complain about losing the capital gains tax break if ALL income is taxed at near what the capital gains rate used to be. Social Security revenue increases and benefit cuts need to come together for both fiscal and political reasons. Excessive spending needs to come out of both civilian and military programs at the same time so that the combined benefits are great enough to balance the pain.

For fiscal year 2010, federal spending is estimated at 25.55% of Gross National Product! This ratio hasn't been this high since fy 1946 as the country struggled out from the costs of the Second World War. The deficit proposal caps federal spending at 21% of GNP. This hardly an extreme measure; in fy 2008 federal spending only added up to 20.65% of Gross National Product (but GNP was higher during the boom, of course).

Some on the right argue that capping federal government spending at 21% of GNP is still capping it at too high a rate. Historically, however, federal spending was more than 21% of GNP for all of 1980-1987 and from 1990-1993. In recessions and in times of slow growth, GNP gets smaller and demand for government services is greater. A cap needs to accommodate that variability. Moreover a cap isn't a minimum; if government is going to run up against the cap in tough times, it will be well below the cap in good times. For example, federal spending was only 17.98% of GNP in 2000, just before the Internet bubble burst. Federal spending hadn't gone down; the economy was simply booming.

(My numbers on federal spending as a percentage of GNP come from here.)

Moreover, the deficit proposal also eliminates $1.1 trillion dollars of tax expenditures. They don't show as government spending but they really are. Getting rid of the tax expenditures is equivalent to reducing the federal share of the economy by almost another 2%. That's a big deal.

Others on the right complain that the deficit proposal doesn't end ObamaCare, eliminate the Department of Education, or do away with whatever programs or departments they hate most. Some programs do have to go; but, if we get bogged in program-by-program analysis now, we won't set a cap on the runaway geyser of federal spending. That would be an enormous missed opportunity. Once the cap is in place and it's clear that not everything can be funded, there'll be plenty of time to argue priorities.

In an excellent op-ed in The New York Times today, Ross Douthat answers objections from the left much more eloquently than I can:

"Liberals defended this knee-jerk response [against the proposals] on the grounds that the commissioners' vision, ostensibly bipartisan, was actually tilted toward Republican priorities. And it's true that Bowles and Simpson proposed more spending cuts than tax increases over all. But most of the programs and tax breaks that they suggested trimming — from farm subsidies to Defense Department bloat and the home-mortgage tax deduction — represent the American welfare state at its absolute worst. And the duo went out of their way to avoid balancing the budget on the backs of the poor. (Social Security, for instance, would be strengthened through a mix of tax increases and benefit cuts for wealthier seniors; retirees close to the poverty line would see their benefits increase.)

"Their proposals certainly weren't flawless, but they did manage to include good ideas from right and left alike. And it's illuminating, and very depressing, that Democrats were so immediately outraged by a plan that reduces corporate welfare, makes Social Security more progressive, slashes the defense budget, raises the tax rate on millionaires' summer homes — and does all of this while capping the government's share of gross domestic product, not at some Scrooge-like minimum but at the highest level in modern American history."

Assuming that the proposal from the full commission isn't a drastic retreat from what the co-chairs have proposed, it should go to an up or down vote in the first month of the new Congress. The President should support what his own commission has come up with; Republicans should do what's right for the country even if that makes the President look good and improves the economy quickly enough to affect the 2012 election. There's no excuse for timidity; there's no excuse for obstructionism. It will be a huge effort to fight back the lobbies on this one and it needs to be a bipartisan effort since the opposition will surely be bipartisan.

The draft proposal of the Deficit Commission doesn't solve every problem or right every wrong; it doesn't gore every sacred cow or end every wasteful or harmful program. It shouldn't be a surprise that there will still be work to do and legislative battles to fight even after the budget is trending back towards balance and the debt is being paid (slowly) down. We can't let the perfect be the enemy of the good. We have an unparalleled opportunity to get the size of our government back under control. We need to make clear to our elected representatives that they need to act.

Related post:

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

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