David R. Francis

Boost jobs or cut the deficit? US can do both.

Lawmakers face the difficult task of tackling the budget deficit without endangering the recovery. One way to do so is to make government more efficient.

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    This February 2010 file photo shows the National Debt Clock in New York. With a national debt surging upwards of $13 trillion and unemployment hovering around 10 percent, lawmakers must find a way to trim the deficit long-term while stimulating the economy in the short-term.
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Washington's "twin deficit" problem – a huge jobs deficit and a massive budget deficit – poses challenges never before faced by the United States.

And the biggest challenge, notes Allen Sinai, head of the consulting firm Decision Economics, is how to grow the economy faster to lower the jobless rate while reducing the growing budget deficit.

There are hundreds of ideas. On June 30, some 90 people suggested solutions before President Obama's bipartisan National Commission on Fiscal Responsibility and Reform – four minutes per individual or organization. "People really care about this issue," says Fred Baldassaro, commission spokesman.

Mr. Sinai proposes that Congress and the administration engage "the best minds" to find ways to limit spending through greater efficiency measures. "Everything should be on the table," he adds, including:

•Shrinking the federal government, possibly including the number of departments. The federal apparatus, he says, is the only major business that has not gone through a "major restructuring" of the type big corporations have accomplished.

•Imposing a tiny tax on financial transactions, such as stock and mutual fund sales and purchases. Depending on details, this could raise $100 billion a year. According to his computerized model of the economy, such a tax would have only a minimal dampening effect on the economy.

•Using these extra revenues to trim the Social Security tax on payrolls. This, Sinai maintains, would encourage business to hire new employees. By shrinking the number of jobless, it would revive the economy in a way that would gradually boost revenues to offset the lost revenues.

•Ending the "carried interest" tax loophole that enables hedge funds to characterize earnings as low-taxed capital gains rather than regular income. It would raise another $25 billion to $40 billion a year.

These suggestions would thread the policy needle: cutting spending without sacrificing growth, says Sinai, whose 1,000-equation model of the economy predicted in 2006 the bursting of the housing bubble and also forecast the Great Recession and subsequent revival.

Federal, state, and local governments can be made more cost-effective by reducing the many redundancies among them, says economic consultant Gail Fosler, former head of the business-backed Conference Board. She also calls for using more market approaches and private choices to substitute for government services.

"There is a tremendous opportunity to bring innovation to the actual provision of these services," she says, calling for "drastic solutions" to a public deficit larger than any since World War II.

The seriousness of the budget deficit has won more and more attention. Mr. Obama on June 30 spoke of "running the credit card in the name of future generations." But he made no specific proposals for cutting the deficit. The latest Congressional Budget Office (CBO) estimate is that public debt will rise from 62 percent of gross domestic product this year to 84 percent by 2040. "Unsustainable," the nonpartisan body says.

The difficulty of taming the deficit arises in part from the recession. Another factor is the aging of the US population. This adds especially to the cost of Medicare and Medicaid. Aging, says the CBO, is "the most important driver of spending growth over the next several decades."

Lawmakers face the delicate task of tackling the deficit without cutting off a weak recovery.

David R. Francis writes a weekly column.

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