“With just five weeks until its deadline, a secretive Congressional committee seeking ways to cut the federal deficit is far from a consensus, and party leaders may need to step in if they want to ensure agreement, say people involved in the panel’s work,” reported the New York Times. The secretive committee, officially known as the Joint Select Committee on Deficit Reduction, has come to the expected impasse. Its membership comprised of six Republicans and six Democrats, evenly divided between members of the Senate and the House.
James Tatum: So, Neil, for the sake of fantasy, we’ll discuss this issue within the context we are members of this deficit committee; Sen. James Tatum (I-Mich.) and Sen. Neil Weinberg (I-Ohio), and let’s say the rest of the committee members have given us carte blanche to hammer this out. The latest data I could collect shows our national debt equaling $14.9 trillion or around 100 percent of GDP, and the deficit for the fiscal year of 2011 is expected to be $1.3 trillion. My first move comes from the instructions left by the Bowles-Simpson commission that Pres. Obama ordered, and I think by simplifying the tax code and eliminating deductions we can lower the corporate tax rate to 26 percent from its current rate of 35 percent.
Neil Weinberg: I don’t have a problem with that suggestion, but allow me to redefine our commission. We have to cut $1.6 trillion and President Obama would like us to increase that number to $2.1 trillion. Instead of trying meet artificial deficit reduction goals set for political purposes, let’s set our own goal. The national debt must be kept under 100 percent of GDP, with room for recession era deficit expansions. In other words, we must strive to keep our national debt lower than the value of our economy. We can’t do much about the high deficits of the last few years, and trying to offset them all at once will only contract our economy further. Here’s a campaign anthem for you: Stop the Bleeding, Plan Long term, and Set Realistic Goals. Not all that sexy, but it’s a start.
JT: I actually like your anthem, and I’ll let you set the benchmark for deficit and debt reduction. On another point, I’m really happy I don’t have to stress that all-around austerity could make our current economic situation worse. In that vein, I propose $1 to 2.2. trillion in spending on the country’s infrastructure (over the next couple of years). That amount comes from the American Society of Civil Engineers, which assesses America’s infrastructure every few years (we received a D after our last assessment). I think this will act as much-needed economic stimulus, it’ll improve the country, and the yield on the Treasury is at all-time lows, which makes this the opportune time for that
kind of public investment.
NW: I think you’re absolutely right that this is the time to spend on infrastructure for two reasons. First, you’re never going to find a cheaper time to spend on construction and labor. Second, we need it. But, now we’ve added another several hundred billion to our yearly expenditures. Let’s discuss how to bring the budget back closer to balance. One thing we really need to understand is that a recession, especially a prolonged one, creates significant deficit pressure. A shrinking economy means less revenue, but that revenue will come back. In 2007, we brought in $2.6 trillion and this year we probably brought in $2.1 trillion. When things get back to normal, we’re already a third of the way to a balanced budget, probably more if you figure the government won’t spend as much on the safety net as people get back to work. Yet, projected expenditures grow each year at a faster rate than revenues. Here is what I propose to slow the rate of growth on the expenditure side so it falls in line with the growth rate in revenue: Each year during the next decade, we evaluate one sector of government spending completely and allow the rest to stay put. So next year, we do a complete review of military spending and truly evaluate where we have waste, where we can cut and where we need more. We don’t do that now, because the task is too daunting to handle all at once. We just say, something cost X last year, and this year we need X 3 percent. Once we review everything, we’ll be able to address tax policy as a means to offset whatever deficit is left over.
JT: I’m on board with your proposal to review the federal budget year by year rather than start slashing right away. It’s similar to the actions taken by the Canadians when they found themselves in a fiscal crisis back in the 1990’s. A podcast by the Tax Foundation described how the Canadians conducted a multiyear series of budget cuts (2-year intervals) and after a couple of years found themselves with surpluses. Also, since you agreed with the need for public investment in infrastructure for economic stimulus, I think you’ll also see the need to provide a bailout for the states. Only $300-400 billion would be needed according to the Economic Policy Institute, which estimated the shortfall states have faced the last few years. The reason for this expenditure is it makes no sense to conduct expansionary policy at the federal level, while state and local governments, because they are required to have balanced budgets, are conducting a policy of contraction.
NW: Or the states could just repeal their budget amendments. You can’t expect a government to balance its budget every year, because the revenue is based largely on factors you can’t predict. If the economy shrinks, states lose revenue from income and sales taxes, but they shouldn’t have to cut services. The federal government can borrow – why can’t the states? As long as they have assets worth more than the debt, I’m not worried. It makes more sense to spread the debt around than to concentrate it all on the federal level. Once we’ve done serious expenditure review, we should move onto tax reform to craft a policy that raises the kind of revenue we need. I believe simplification is the key. Minimize deductions and exemptions, because it’s wrong to have a tax policy that benefits people who can hire tax attorneys. Also, we need to eliminate subsidies to agriculture and oil companies. Many of those subsidies and exemptions are from another time, but remain on the books because no one wants to give up a tax policy that benefits them. Complicated laws give people and companies places to hide; simple laws expand the tax base fairly before we consider a tax rate increase.
JT: Sen. Weinberg, I don’t know if it would be realistic or feasible to have more than a couple of states repeal their balanced budget statutes, especially since a lot of state houses are controlled by the Republican Party, and I actually support states having to balance budgets. But that is a debate for another time. I think a simplification of the tax code is in order as well, and those subsidies for oil and ethanol – which are harder to kill than Freddy Krueger – need to be finished off. The last idea I have is for a temporary Tobin tax or financial transaction tax; it would only be levied on transfers worth $250,000 (to shield the lower and middle class) and upwards, and the revenue could be used for deficit reduction, or helping out homeowners in a struggle. I know most of this discussion has been about new expenses, but, as you said, a healthier economy will make our work easier. The federal government will bring in more revenue without even raising any rates. Anyways, I’ll let you bring this commission to a close.
NW: I think what we’ve decided on makes a great deal of sense. The deficit commission needs to support policies of economic growth, because growth shrinks deficits. Next we need to spend money on things that we need and can’t simply close the checkbooks, because it’s good politics. After that, instead of slashing anything that doesn’t cost us votes, we need to spend a decade or so studying each sector of the government clearly. We should reform entitlements, defense spending and everything else, but we should do it slowly and piece-by-piece, so we can actually achieve real results. After that, we should reform the tax code to meet the needs of our system, not the needs of our politics. We need to do this carefully and slowly. A plan to slash $2 trillion is great at the ballot box, but you can’t possibly come up with a well-crafted plan in 60 days. This is a really complex thing that needs time. We should cut everything that we actually want to cut, and then raise revenue to match what level of services we desire. The goal of this commission should not be to cut, it should be to balance. We need to make a value judgment about how much we want and how much we want to spend. Those levels need to be equal, and we need to accept that we aren’t going to love everything about this plan. The key recommendation here is this process needs to be ongoing, and not a single Hail Mary.