A debt opportunity deferred, not entirely lost

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  • A compromise must be made on #tax and entitlement cuts #budget

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  • GOP and #Dems have the tools to address the fiscal imbalance this year, if they can find the courage to use them

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  • 12-member bipartisan "super committee" to recommend an additional $1.5 trillion of deficit reduction by Thanksgiving

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At first glance, the new debt-ceiling law looks like a missed opportunity to address our nation's most pressing fiscal challenge. Although the law imposes much-needed limits on annually appropriated spending, it seems to take a pass on narrowing the long-term imbalance between entitlement spending and revenue. Fortunately, the opportunity to tackle this problem hasn't been lost, only deferred. The new law gives Republicans and Democrats the tools they need to address the fiscal imbalance later this year, if they can find the courage and flexibility to use them.

The law calls for a 12-member bipartisan "super committee" to recommend an additional $1.5 trillion of deficit reduction by Thanksgiving. To motivate the committee and Congress, the new law decrees that large spending cuts, including defense reductions and cutbacks in Medicare payments to doctors and hospitals, will take effect automatically if the committee can't reach agreement or if Congress fails to approve its recommendations. While it would be bad budget policy to actually implement these automatic cuts, that's by design. The cuts are intended to be undesirable, giving members of both parties an incentive to forestall them by making the committee's work a success.

"Blocking tax increases today may be ideologically satisfying, but it's counter-productive if it also blocks major entitlement cuts." -- Alan Viard

The threat posed by the automatic cuts may help spur the super committee toward agreement, but there are no guarantees. After all, Congress can always pull the plug on the cuts with future legislation. In the end, the success or failure of the committee will depend, not on automatic cuts or other mechanical features, but on the willingness of both parties to compromise.

Democrats will have to accept cuts in entitlement benefits, particularly in Social Security and Medicare. The long-term fiscal imbalance is caused by the rapid projected expansion of entitlement spending, driven by rising medical costs and the aging of the population, and solving the imbalance will require spending restraint. Although it is important to maintain a safety net for those in need, long-run economic growth will be better promoted by reducing entitlement spending than by pushing marginal tax rates up to punitive levels. Genuine entitlement restraint will require real benefit reductions, not the wishful thinking about cheaper medical care to which both parties are prone.

A solution to the fiscal imbalance will also require compromise by Republicans. A rigid insistence that there can be no tax increases or that federal revenue cannot exceed its historical average of 18 to 19 percent of GDP is a sure way to prevent any major entitlement reductions from being adopted. That outcome is something no Republican should want, because it means that future tax burdens will actually be larger.

Blocking tax increases today may be ideologically satisfying, but it's counterproductive if it also blocks major entitlement cuts. Each dollar of debt issued to finance today's entitlement spending must be serviced with future tax increases. Or, with future spending cuts, but does anyone think that's how future presidents and Congresses will finance this debt service?

Of course, there would be less need to compromise if there was a real prospect that Republicans could someday solve the fiscal imbalance with sweeping entitlement cuts unaccompanied by tax increases, presumably after winning the White House and both chambers of Congress. But, it's unrealistic to think that Republicans will ever take on programs as popular as Social Security and Medicare without the cover of a bipartisan agreement. They are far more likely to yield to the temptation to seek political advantage by defending or expanding these programs. In recent years, Republicans have done just that, first working to expand Medicare to cover prescription drugs and then attacking President Obama's health care reform for cutting Medicare.

If Republicans and Democrats are willing to compromise, the super committee has ample time and opportunity to develop a successful deficit reduction package, ideally one much larger than the prescribed $1.5 trillion. A key step is for both parties' leaders to coordinate on the appointment of moderate members to the super committee, avoiding the gridlock that would result from a duel between opposing hard-liners.

Although compromise will be difficult, there is historical precedent. In 1983, President Ronald Reagan accepted a bipartisan agreement that raised Social Security taxes, because it also restrained the long-run growth of Social Security spending. New York Republican congressman Barber Conable aptly described that agreement by saying, "It may not be a work of art, but it is artful work." The new debt-ceiling law is certainly no work of art. But, if Republicans and Democrats seize the opportunity that the law offers, the super committee may be able to do some artful work.

Alan D. Viard is a resident scholar at AEI.

 

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
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