“Even in the face of public outrage,” said Senate Minority Leader Mitch McConnell with a sigh, in response to Barack Obama’s most recent request to extend the stimulus, “Democrats are showing either that they just don’t get it on this issue of the debt.”
The reason “this issue of debt” causes so much confusion is that we say things like “this issue of debt.” When we talk about the debt, we need to talk in specifics, not vague generalities. First, there’s the difference between accumulated debt (how much our country owes) and annual deficits (how much we’re spending in a year compared with how much we’re getting in tax revenues). People often use the two terms interchangeably. They shouldn’t.
Then, we need to be clear about the timetable we’re talking about: short-term deficits driven by the Great Recession, which many economists think should actually go up in order to kick-start the economy; medium-term deficits over the next decade or so, which many economists think need to go down if we’re to avoid higher interest rates and market confusion; and long-term deficits, which are driven by health-care costs and which most everyone agrees need to go down if the country is to avoid bankruptcy.
Finally, we need to be clear about what we’re willing to do about the debt. If people are talking about deficits and not saying what spending they’ll cut and which taxes they’ll raise, they’re not saying anything useful. To help us get specific, I asked Maya MacGuineas, who leads the nonpartisan Committee for a Responsible Federal Budget, to price out some of the policy options. We focused on the time period between 2012 (when new policies would go into effect) and 2022. The spreadsheet she sent me was vast and intimidating, but here are some of its lessons.
These are very big numbers. First, we need to make some assumptions to calculate how much debt we’re likely to have. Let’s say the Bush tax cuts expire for people making more than $250,000 and discretionary spending grows very, very slowly in the coming years. By 2022, that scenario will put debt at about $21.5 trillion. From there, a lot of budget experts think that the debt will need to come down to $14.6 trillion, which is about 60 percent of (projected) GDP. That means we’ve got about $6.9 trillion to cut between now and 2022.
All is lost if the economy doesn’t recover. Deficits are in large part a function of economic conditions. High unemployment means less tax revenue, and more people need social services, which means more government spending. If we don’t get our economy moving again and we remain trapped in that high-spending, low-revenue cycle, we’ll never get deficits under control. So it makes sense to do quite a bit more in stimulus over the next year or two if we think it’ll help accelerate economic growth. And, yes, we can afford it: $100 billion in additional stimulus is slightly more than one half of 1 percent of our anticipated debt. Don’t be fooled by false deficit prophets: there are a lot of policies that sound impressive when a politician says them but don’t actually save much money. Cutting foreign aid in half, for instance, will save $210 billion by 2022. That’ll get us 3 percent of the way there. Cutting earmarks in half is even less effective: it’ll get you $130 billion by 2022.
The Bush tax cuts are really, really expensive. They expire at the end of this year. If you renew all of them, you add $6 trillion to the deficit between 2012 and 2022. If you let the cuts for the rich expire—which is what we’re likely to do—you’ve still stacked up $4.9 trillion in debt. If you drop everything except for the AMT patch, you’ve added only $1 trillion. That would deal with much of our medium-term problem right there.
Closing the deficit will be difficult without raising taxes. It’s just hard to find that much money on the spending side that fast. People like to talk about raising the eligibility age for Medicare and Social Security, but if you raised them to 67 and 68, respectively, you’d only get $560 billion. That’s only 8.1 percent of the way to our goal.
Entitlement reform will require patience. In the medium term, there’s just not that much you can do on entitlements. Any major changes will have to be phased in slowly, as you can’t tell people retiring in five years that the health benefits or pensions they paid for and we promised them won’t be there. Moreover, the entitlement crisis is driven by Medicare and Medicaid, not Social Security, and the Medicare and Medicaid crisis is driven by health-care costs in general. Over the long term, our fiscal future basically comes down to a simple question: can we get health-care reform right?
Watch mandatory spending, not discretionary spending. Most of the money is in spending—and tax breaks—that grow automatically, not the discretionary spending that Congress has to approve every year. We’re talking here about the entitlement programs, but we’re also talking, to a degree people don’t realize, about tax expenditures. You could save $480 billion by limiting itemized tax deductions for wealthy filers, $820 billion by replacing the tax protection for employer-based health care with a flat credit, and $940 billion by curtailing the state and local tax deductions.
There’s no such thing as “non-defense discretionary spending.” That’s a term politicians have come up with because they’re afraid to touch defense spending. But in a world of deficit reduction, it’s defense or education; defense or higher taxes. A panel led by Barney Frank recently came up with $1 trillion in proposed reductions over the next decade. They need to be on the table.
Look for two-fers. There’s a lot we could do to improve the budget picture that would also fulfill other goals. A carbon tax would reduce carbon emissions and raise $700 billion. Reducing farm subsidies would save $160 billion and also get rid of a wasteful program that distorts the agricultural market. Ending the tax preference for employer-based health care would save $820 billion and lead to a more efficient and less costly system. Do this yourself: we talk a lot about reducing the deficit, but not about what programs we’re going to reduce and which taxes we’re going to raise to get there. The Committee for a Responsible Federal Budget, however, has built an interactive calculator that allows you to cut, tax, and spend your way to a better budget picture. It’s here, and it’s the best way to understand “this issue of debt.”