January 19, 2020

Deficit Panel Gets New Message: ‘Go Big’

A group of at least 57 prominent business executives and former government officials have signed a petition in support of a greater deficit reduction, which they are to release at a news conference on Monday. Among them are former treasury secretaries, budget directors and economic advisers to eight presidents from Richard M. Nixon to Mr. Obama; former Congressional leaders; and executives of top companies.

Their letter reflects a broad sense of urgency in both parties, and among economists and businesses, that the nation must put in place long-range measures to shrink future deficits. At current spending levels, those deficits are expected to balloon over the next decade as the population ages and as health care costs rise.

The letter does not call for short-term job-creation measures like the tax cuts and infrastructure spending Mr. Obama proposed last week, which would add to deficits initially. Even so, many of the signers, liberals and conservatives, have called for such steps.

The petition does include what has fast become a catchphrase for those who believe Congress is thinking too small. “We urge you to ‘go big,’ ” they wrote, “and develop a large-scale debt-reduction package sufficient to stabilize the debt as a share of the economy.”

Generally that level is estimated at $4 trillion in deficit reductions over the decade, savings that would build in later years. Because Congress and Mr. Obama already agreed last month to nearly $1 trillion in reductions in so-called discretionary spending for social and military programs, the special committee would have to find more than $3 trillion more to meet that goal — double its mandate for $1.2 trillion to $1.5 trillion, written into the August deficit-reduction deal.

Mr. Obama has called for a goal of at least $2 trillion, though the extra savings would mostly offset the up-front costs of his new $447 billion stimulus plan.

A higher deficit-reduction goal would increase pressure on both parties to address the two main drivers of projected high debt: the rapid growth of spending for the Medicare and Medicaid programs and an inefficient tax system unable to keep pace. That would test Republicans’ opposition to raising any tax revenues from high-income individuals and corporations, and would challenge Congressional Democrats to agree to more savings from entitlement programs than they would like.

Yet it is the parties’ differences on taxes and government health care benefits that have many in the White House, Congress and outside groups skeptical that the 12-member panel, which is split evenly between Republicans and Democrats and House and Senate members, can reach agreement even on the lesser goal.

Several signers of the letter said they had no illusions that their appeal alone would persuade many lawmakers, especially Republicans, to compromise. And while Congressional Democratic leaders have indicated that they would follow Mr. Obama in backing a compromise, many Democrats fear that doing so would undercut their ability to attack Republicans in 2012 for their proposals to remake and shrink Medicare and Medicaid.

The threshold of $4 trillion was first suggested in December by a majority of the fiscal panel that Mr. Obama established in 2010, led by Alan K. Simpson, a former Senate Republican leader, and Erskine B. Bowles, a former chief of staff to President Bill Clinton. Both men signed the letter.

“That is not a number that people just made up because the No. 4 bus just drove by,” Mr. Bowles said in an interview. “It’s the minimum amount we need to do in order to stabilize the debt and put it on a downward path as a percent of G.D.P.”

The public debt amounted to 62 percent of the nation’s gross domestic product last year and is projected to reach 77 percent of economic output by 2021.

Other signers include George P. Schultz, a former secretary of labor, treasury and state; Martin Feldstein and Murray L. Weidenbaum, top economic advisers to President Ronald Reagan; and the first chairman of Mr. Obama’s Council of Economic Advisers, Christina D. Romer.

The businesspeople include David M. Cote, the chairman of Honeywell International and a Republican on the Bowles-Simpson commission, and Marne Obernauer Jr., chairman of the Beverage Distributors Company and an owner of the Colorado Rockies baseball team.

The letter writers did not recommend how to reduce deficits, acknowledging that they had “differences of opinion.” But their letter, which was organized by the Committee for a Responsible Federal Budget at the New America Foundation, a centrist research group, makes clear that the solution should include spending and tax changes.

“We believe that a go-big approach that goes well beyond the $1.5 trillion deficit reduction goal” should include “major reforms of entitlement programs and the tax code,” they wrote.

Republican leaders have not joined Mr. Obama in seeking a higher goal. After a Rose Garden event on Monday, Mr. Obama will send Congress his jobs bill and long-term deficit cuts to offset its cost; next week he will propose another $1.5 trillion in deficit reductions to the committee.

“We’re certainly open to hearing the president’s ideas,” said Michael Steel, a spokesman for Speaker John A. Boehner.

The Senate Republican leader, Mitch McConnell of Kentucky, said last week: “I’m not going to prejudge what the joint committee might do. It has a broad array of options. But its goal, obviously, is to do something significant about deficit reduction with a floor of between $1.2 trillion and $1.5 trillion over 10 years.”

He added, “We’ll see whether they can even go beyond that.”

The committee is to report by Nov. 23, and Congress must hold an up-or-down vote by Dec. 23.

“Is it 50-50 that they’ll do something big and bold? No,” Mr. Bowles said. “But I think there’s a real chance. There are a lot of people on that committee, Republicans and Democrats, that I’ve talked to personally that want to do something big.”

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Economic View: It’s 2026, and the Debt Is Due

The following is a presidential

address to the nation — to be

delivered in March 2026.

MY fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.

For many years, our nation’s government has lived beyond its means. We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security. They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embraced health care reform with subsidies for middle-class families.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.

This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk. Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.

So where do we go from here?

Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.

This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.

We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.

We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.

We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.

We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

AS I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.

N. Gregory Mankiw is a professor of economics at Harvard.

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