October 1, 2014

Supercommittee Advice: They've Got to 'Go Big'

This originally appeared in the Milwaukee Journal Sentinel at http://www.jsonline.com/news/opinion/supercommittee-advice-theyve-got-to-go-big-0j2tigv-133275803.html

By Diane Lim Rogers

The supercommittee established by Congress faces a Thanksgiving deadline to come up with at least $1.5 trillion in deficit reduction over the next 10 years, and there are lots of reasons to be pessimistic that a group of sitting politicians could possibly be successful.

My organization, The Concord Coalition, is urging them to "go big" - to reach far above their mandated goal. But there are two sides to the "fiscal sustainability" equation - the deficit side and the economy side.

Deficits per se aren't "bad." It's when deficits become too large for the economy to keep up, and when deficit-financing is used to buy the wrong things (that aren't good investments), that deficits become not just an accounting problem, but a truly economic problem.

In the short term, deficit spending is a good thing when it is designed to encourage demand for goods and services and hence jobs. But fiscal responsibility in this context requires getting the most out of each deficit-financed dollar spent. We could do much better than we've been doing by shifting resources away from low bang-per-buck activities toward higher bang-per-buck ones. We could do better stimulus with less money.

Over the longer term, growth will come from increasing the supply side of the economy - our stock of productive resources, both human and physical. Here we must be wary of seemingly easy fixes, such as proposals to cut tax rates. In a full-employment economy, deficit-financed tax cuts represent a dollar-for-dollar decrease in public saving. Any positive effect on private saving usually falls far short of the drop in public saving, so that national saving - and the capital stock's contribution to supply-side economic growth - declines.

The greatest pressures on the federal budget in the decades to come are in entitlement programs because of the aging of the population coupled with rising health costs. We need to keep working on policies to restrain that growth. But it is hard to see how our society would choose cuts in real per capita benefits of the magnitude necessary to both achieve sustainable deficits and keep revenues at the historical average. And we would never be able to do it soon; entitlement reforms would have to be phased in much more slowly than tax reforms could take effect. Thus, tax policy has to be not just any part, but a huge part, of the 10-year solution and the supercommittee's recommendations.

The Concord Coalition's "plausible baseline," a business-as-usual projection, shows triple the 10-year deficits of those calculated under official current-law projections. The biggest reason (83%): tax policy and the plethora of expiring, deficit-financed tax cuts. Given that the current-law baseline achieves an economically sustainable level of deficits over the next 10 to 20 years, making a commitment to achieve current-law revenue levels seems to be the supercommittee's not-so-magic ticket.

The supercommittee could require that the tax-writing and budget committees come up with a combination of budget rules and tax reforms that would achieve the current-law baseline level of revenues.

There are many different policy paths to this same budgetary outcome:

"Do nothing" (let the Bush tax cuts expire as scheduled at the end of 2012), "do it big" (broaden the tax base by reducing tax expenditures and lowering tax rates), and "do it to the rich" (raising tax rates on millionaires and/or large corporations).

Each approach has different relative advantages regarding their economic effects and political attractiveness. We could do any combination of the approaches and all would be encouraged in practice with a commitment to strict, no-exceptions, pay-as-you-go rules - both on new or extended tax cuts and as well as spending increases.

Coupled with the spending-cuts-only approach taken in the first round of deficit reduction that arose from the debt-limit debate, the second-round supercommittee recommendation of sticking to current-law revenue levels would get us the big and balanced approach we need to set us on the path toward true fiscal sustainability and a strong economy in the decades to come.