Back in late 2004, when George W. Bush was poised to win a second presidential term and Barack Obama was still a lowly state representative campaigning for a Senate seat, you probably would have shrugged if anyone had asked you about the long-term fiscal position of the country. Everything seemed to be fine. Yes, the Bush tax cuts had reduced a significant revenue stream and the country had recently launched a major war. But tax receipts were high, and the economy was strong. Just a few years earlier, President Bill Clinton had managed to balance the budget through smart policy and a bit of luck. Surely it could be done again in a pinch.
Clearly, a lot has changed in the last six years. Thinking back is helpful in understanding much of the current conversation about America’s long-term fiscal deficit. The attention of the fickle political media may be currently focused on fiscal matters, but unfortunately much of their conversation is alarmist and misleading. (The Wall Street Journal titled their coverage of a speech by Federal Reserve Chairman Ben Bernanke, “Bernanke: Yuan Too Low; U.S. Must Avoid Greece-Like Debt Crisis”). Meanwhile politicians loudly parade their credentials as deficit hawks before casting votes that say the opposite. Lost in the discourse is the truth: the single best way to address the deficit is through an increase in tax receipts driven by a robust economic recovery.
In response to growing concern about the deficit, Obama convened the National Commission on Fiscal Responsibility and Reform, popularly called the Simpson-Bowles group. Tasked with studying and proposing strategies for deficit reduction, the group released the report of their final recommendations last week to great fanfare. Conservatives and moderate Democrats generally considered the proposal to be a helpful “starting point,” in the words of Senator Judd Gregg (R–NH). On the other hand, many progressives expressed concern over the entitlement cuts included in the report, while Paul Krugman pointedly criticized the proposed tax revenue cap of 21 percent of GDP.
There was never an honest consideration of the direct fiscal effects of the report. On page ten of the proposal, the drafters provide a graph outlining three potential fiscal trajectories. The first scenario shows spending careening upward if probable legal changes—some of which were passed by Congress in a compromise on Monday—go into effect. The second shows the baseline scenario if the law, as of Dec. 1, continued without change. This is basically a straight line. The final line shows the trajectory of the Commission’s recommendations. Interestingly, the Commission’s proposal leads to a higher deficit spending level than the baseline scenario through 2020. After that point, the Commission’s proposal begins to slowly ease downward, theoretically reducing the long-term budget deficit. However, there’s no guarantee future Congresses will see the proposal the same way. Given the difficulties with the proposal, President Obama—or a potential successor in 2012—could actually have a larger effect on the deficit by simply vetoing any bill that was not deficit-neutral.
It’s impossible to predict what will happen in the future, especially with a topic as complicated as the U.S. fiscal deficit. Recall once again that Obama was not even an elected member of the Senate just six years ago, while then-President Bush was beginning to push for Social Security privatization. The Simpson-Bowles proposal, which is designed to begin in 2012, will be largely- if not completely- forgotten by the time it would have any real effect in 2020. We can’t fathom what macroeconomic factors—outside the influence of Congress or individual actors—will alter the fiscal picture at that time, never mind the political improbability of getting the reforms proposed by the Commission put into law.
Which brings me to the compromise on Monday. Republicans and Democrats huddled together to produce a package that will add $900 billion to the deficit. Setting aside the hypocrisy of Republican lawmakers—who universally railed against the rising debt while relentlessly pushing for lower taxes on the wealthiest Americans’ income and estates—the plan will actually do a lot of good if one overarching idea is accepted. Economically stimulating provisions like the increase in unemployment benefits for another 13 months and the temporary extension of the Bush tax cuts for those making under $250,000 a year are a step in the right direction. Despite its shortcomings, the compromise on Monday amounts to a badly needed $900 billion stimulus package. And in the face of fiscal alarmism, it is a move that will ultimately be vindicated in the long term.
