3 views on best way to curb US debt
US national debt stands at more than $16 trillion and counting. Polls show American voters rank deficits and debt as top concerns, but lawmakers have been divided over the best way to curb them. Mitt Romney and President Obama have sparred over their own plans to cut budget deficits and tackle the debt.
As the seventh installment of our One Minute Debate series for election 2012, three writers give their brief take on the best way to curb US debt. Stuart Butler of the Heritage Foundation argues American should "cut spending." On the other hand, Dean Baker, at the Center for Economic and Policy Research, says the US should "keep spending" to spur growth. Isabel Sawhill of the Brookings Institution suggests a "middle way" – cut spending and raise taxes.
1.Cut spending: Americans are not undertaxed. The problem is out-of-control spending on entitlements.
Republican vice-presidential candidate Rep. Paul Ryan of Wisconsin speaks in front of the campaign's 'national debt clock' in Dover, N.H., Sept. 18.
(Brian Snyder/Reuters/file)
The only way to get the US debt under control is to curb spending. Americans are not undertaxed. As the economy recovers, we’ll pay the same proportion of our national paycheck (just over 18 percent) in taxes as we’ve done on average for the past 50 years.
Our problem is too much spending. Inflation-adjusted federal spending per household has jumped 36 percent over the past decade, to more than $30,000 a year. And spending is literally out of control. Two-thirds of it goes to programs such as Medicaid for the poor, and Medicare and Social Security for older people. These “entitlements” don’t even require annual congressional votes.
The fix? First, put all programs, including Medicare, on a real long-term budget that has to be voted on each year. That would impose real control over what is now autopilot spending.
It’s true that Congress could always increase this spending. But lawmakers would have to do so openly, and the do-nothing default setting would be to stick to the budget – today the default is automatic increases in spending.
Second, to slow unsustainable entitlement spending, some of us who are baby boomers or seniors will have to accept some belt-tightening. Taking every penny of Social Security and Medicare we’ve been promised will only force our kids and grandkids deeper into the quagmire of national debt. That’s just not right. So if we are well off, we need to agree to a smaller Social Security check and higher Medicare premiums.
And third, once we get spending on track again, we need a federal balanced-budget amendment with a spending limitation to stop Congress from overspending – just like the amendments that force states to put their houses in order.
Sending more money to Washington is not the answer. It will simply be spent as it always has been. Spending control is the only solution.
Stuart M. Butler is director of the Center for Policy Innovation at The Heritage Foundation.
2.Keep spending: Tolerate high deficits for job growth; raise taxes on wealthy to invest in roads, schools, R&D
Tackling long-term debt is not the nation’s most urgent fiscal problem. Getting a full head of steam behind the recovery must be the priority, and for that, we’ll have to tolerate high annual deficits for a while.
The folks who make and write about economic policy must have very bad memories.
Otherwise they would know that the large deficits we are now seeing are the result of the collapse of the housing bubble and will eventually come under control.
In 2007, before the bubble burst, the deficit was just 1.7 percent of the nation’s economic output, or gross domestic product, and the ratio of debt to GDP was falling. The debt-to-GDP ratio was projected to continue to decline even if President George W. Bush’s tax cuts were extended past 2010.
This all changed with the collapse of $8 trillion in wealth related to housing. This collapse eliminated more than $1.2 trillion in annual construction and consumption demand. Construction plummeted because of an enormous oversupply of housing from the boom years. Consumption fell because the bubble wealth that had sustained it disappeared.
The private sector was not going to replace this demand quickly. This was the rationale for the tax cuts and increased spending that led to large deficits.
The resulting deficits will be necessary to sustain employment and growth until private-sector demand picks up. Once that happens, deficits will be at a more manageable level. We will still need some additional tax revenue – for example the money from taking back the Bush-era tax cuts on the wealthy – for infrastructure, education, and research and development.
We will also have to fix our broken private health-care system to ensure that Medicare and Medicaid are affordable in the long term. However, the immediate issue of the deficit is simply a question of replacing the demand lost from the collapse of the housing bubble and getting the economy on its feet.
Dean Baker is an economist and a codirector of the Center for Economic and Policy Research.
3.Cut spending, raise taxes: Follow the bipartisan Bowles-Simpson formula and do both.
To reduce current deficits and slow the growth of debt so that it stabilizes and then shrinks, the United States will need both spending reductions and tax increases. The next Congress and president should quickly enact such measures, but phase them in to avoid undermining a fragile recovery.
The bipartisan plan spearheaded by Democrat Erskine Bowles and Republican Alan Simpson, who led President Obama’s debt commission, suggested roughly $2 in spending cuts for every $1 in tax increases. That’s a healthy ratio. Since Congress approved a spending cut of more than $1.5 trillion over the next decade as part of the Budget Control Act of 2011, the US only needs about $0.5 trillion in further spending cuts and $1 trillion in tax increases to be consistent with the Bowles-Simpson plan.
Over the longer term, spending cuts must include major reforms to entitlement programs such as Social Security and Medicare. This could include raising the retirement age, linking benefits to income, and raising the proportion of earnings covered by payroll taxes. It also means slowing the growth of health-care costs.
Defense spending can be lowered by reassessing threats and ending two wars.
Other domestic spending has already taken a big hit and can’t be reduced much, if any more, without curtailing growth-enhancing, high-priority areas such as education and infrastructure, veterans’ programs, or public safety.
Tax reform that broadens the base by eliminating or limiting many existing deductions and preferences is essential. Cutting out even half of these preferences along with the spending cuts identified above would put the US on a sustainable fiscal path as long as revenues raised are devoted primarily to reducing the deficit and only secondarily, if at all, to reducing tax rates.
Will the next president propose and the Congress enact such changes? Only if the public is ready to follow their lead.
Isabel Sawhill directs the Budgeting for National Priorities project at the Brookings Institution in Washington. She served as an associate director of the Office of Management and Budget from 1993 to 1995 during the Clinton administration.
