Cutting the Deficit, Compassionately - Economic View

Thanks to former President George W. Bush — remember the compassionate conservative? — I have a good name for the fundamental principle that should guide the Democratic alternative: compassionate deficit reduction. The essence is to cut the deficit in a way that does as little harm as possible to people, jobs and economic opportunity. This principle was implicit in much of what President Obama proposed in his 2013 budget, and in what he said about the deficit at the Democratic convention on Thursday. But embracing it more explicitly would improve the substance of the president’s plan, and make it easier to explain to voters.

The first tenet is to go slowly. Investors are willing to lend to the United States at the lowest interest rates in our history. That gives us the ability to cut the deficit on our own timetable. We should pass a comprehensive, aggressive deficit reduction plan as soon as possible, but the actual spending cuts and tax increases should be phased in as the economy recovers.

Why is this the compassionate approach? Because immediate, extreme austerity would plunge us back into recession. The Congressional Budget Office set off alarm bells a few weeks ago when it said that going over the fiscal cliff — a reference to the nearly $500 billion of automatic fiscal contraction scheduled for the start of 2013 — would cause a rapid rise in unemployment. Well, duh.

A crude rule of thumb is that every $100 billion of deficit reduction will cost close to a million jobs in the near term. If that isn’t a reason to move gradually, what is? But if you need another, just look at Europe.

A concrete way to adjust gradually is to pair serious long-run deficit reduction measures with equally serious, near-term jobs measures — like a sizable short-run infrastructure program and a one-year continuation of the payroll tax cut for working families first passed in 2010. President Obama advocated both in his proposed American Jobs Act last September.

Even better would be to give businesses increasing employment a tax credit so large they couldn’t help but notice it, and state and local governments a round of aid generous enough to finally stop the hemorrhaging of teacher jobs and essential government services.

A second feature of compassionate deficit reduction is well-designed tax reform that raises at least some additional revenue. Our budget problems are so large that solving them entirely through spending cuts would devastate the social safety net and slash investments essential for long-run growth and economic opportunity. So revenue increases must be part of the package.

President Obama has repeatedly urged Congress to let the Bush tax cuts expire for those earning more than $250,000 a year. Increasing rates on top earners is an obvious way to raise revenue from those who can afford it most.

Many experts also recommend raising revenue by lowering tax expenditures — the roughly $1 trillion of deductions, credits and loopholes in the income tax code. Cutting tax expenditures would probably have fewer undesirable incentive effects than raising marginal tax rates. But it’s important to move carefully. Many tax expenditures, like the mortgage interest deduction and the tuition credit, go to middle-class families. Cutting only those expenditures wouldn’t be compassionate: it would shift tax burdens toward ordinary families already struggling to make ends meet.

One big tax expenditure benefiting the wealthy is the low tax rate on capital gains and dividends. The tax cuts of 2003 lowered the top rate on this income to 15 percent, far below the 35 percent top rate on other income. Compassionate deficit reduction requires a willingness to raise this preferential rate.

Government health care spending is a major cause of our terrifying long-run budget outlook. Any effective deficit plan has to slow that spending growth. But a compassionate plan would minimize risk to people, especially the most vulnerable.

The central question is whether Medicare and Medicaid should remain entitlement programs guaranteeing a certain amount of care, as Democrats believe, or become defined contribution programs in which federal spending is capped, as Republicans suggest.

Democrats have been forceful in explaining that if the federal contribution is limited and competition doesn’t magically slow costs commensurately, individuals and states will have to pay more. With Medicare, if individuals couldn’t pay the extra cost, they’d have to settle for less complete coverage and fewer benefits. With Medicaid, if states weren’t willing to pay the extra cost, they’d have to throw people off the rolls.

But Democrats need to explain their own plans for slowing government health care spending. To start with, they shouldn’t be defensive about having found $716 billion of Medicare savings as part of the health care reform legislation. They should explain, as former President Bill Clinton did in his speech on Wednesday, that these were reasonable changes that reduced overpayments to providers. They should ask Mitt Romney, who has vowed to roll back these reforms, why he wants to waste taxpayers’ money.

Moreover, Democrats should explain that compassionate deficit reduction will involve more such reforms. Fortunately, there is much inefficiency in the current system, so it should be possible to cut costs without lowering benefits. But if we can’t save enough money by reducing waste and finding better ways to provide care, we might have to consider more painful choices.

Making the wealthy pay a larger share of their Medicare costs, through further means-testing of benefits, would be one way to go. Gradually raising the Medicare eligibility age would be another. That may not sound like a winning message until you contrast it with the Republican plan, which trusts private insurers to decide how to cut costs.

Dealing with the deficit will require more than increasing revenue and reforming health care programs. We’ll also have to cut other spending. Compassionate deficit reduction requires that we choose carefully what to trim.

Spending that protects children, such as money for school lunches and vaccinations, must be maintained. So should assistance for workers displaced by international trade and for veterans struggling to recover from combat wounds.

Democrats shouldn’t be ashamed to advocate actually increasing spending that encourages opportunity and long-run growth. Aid for effective public education and Pell grants that help low-income students go to college aren’t luxuries — they are the building blocks of tomorrow’s labor force and the foundation of the American dream. And spending on infrastructure and basic scientific research is essential for the growth of productivity and standards of living.

BUT to make support for good spending credible, compassionate deficit reducers should be specific about what they would cut. Personally, I’d start with agricultural price supports and subsidized crop insurance programs that mainly benefit large commercial farmers. High-speed rail might be next. (Sorry, Mr. Vice President.) And if the defense secretary says that there is $487 billion that can be safely cut from the Pentagon’s budget over the next 10 years, we should listen to him.

Honest talk about the deficit is risky. Voters are more enthusiastic about the abstract notion of deficit reduction than about the painful details of accomplishing it. But deficit reduction is coming, and this election will most likely determine how it’s done. Democrats owe it to the American people to detail their more compassionate approach so that voters can make an informed choice.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

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Deficit gridlock looms, supercommittee deadlocked (AP)

By DAVID ESPO and ANDREW TAYLOR, Associated Press David Espo And Andrew Taylor, Associated Press – Fri Nov 18, 5:49 pm ET

WASHINGTON – Deadline nearing, the deficit-reduction talks in Congress sank toward gridlock Friday after supercommittee Democrats rejected a late Republican offer that included next-to-nothing in new tax revenue. Each side maneuvered to blame the other for a looming stalemate.

The panel faces a deadline of next Wednesday, the day before Thanksgiving, and lawmakers on both sides stressed they were ready to meet through the weekend in a last-ditch search for compromise.

But there was little indication after a day of closed-door meetings that a breakthrough was likely, both Democrats and Republicans emphasizing long-held political positions.

"Where the divide is right now is over taxes, and whether the wealthiest Americans should share in the sacrifices," said Washington Sen. Patty Murray, the Democratic co-chair of the panel.

But Michael Steel, a spokesman for House Speaker John Boehner, said Republicans had offered "a balanced, bipartisan plan - the fact that it was rejected makes it clear that Washington Democrats won't cut a dime in government spending without job-killing tax hikes."

While prospects for a deal faded, House Democrats checked a Republican attempt to pass a balanced budget amendment to the Constitution. The vote was 261-165, or 23 shy of the two-thirds majority required. GOP lawmakers voted overwhelmingly in favor, while Democrats generally opposed it, sealing its doom.

The vote on a noisy House floor contrasted to the secretive proceedings inside the supercommittee, a panel that projected optimism when it began its quest for a deficit deal late last summer but has yet to come to any significant compromise.

Republicans disclosed during the day they had outlined an offer on Thursday for about $543 billion in spending cuts — leaving Medicare, Medicaid and Social Security untouched — and $3 billion in higher tax revenue.

Most if not all of the recommended savings were items that Democrats have agreed to in earlier talks, but only, party officials said, on condition they part of a larger deal in which Republicans agreed to additional tax increases.

Democrats have long demanded that Republicans agree to significant amounts of higher taxes on the wealthy as part of any deal, and they quickly rejected the offer, according to officials in both parties.

It was unclear where the talks would turn next, but the GOP proposal suggested the discussions had effectively moved into a range of savings far below the $1.2 trillion the committee has been seeking.

It also appeared Republicans were jettisoning a plan for $300 billion in higher tax revenue, an offer that had exposed internal GOP divisions when it was presented two weeks ago. It also has failed to generate momentum for a compromise among Democrats.

If the panel fails to reach agreement, $1.2 trillion in automatic spending cuts are to take effect beginning in 2013, a prospect that lawmakers in both parties say they want to avoid.

That is particularly true among defense hawks, who argue that the Pentagon cannot sustain the estimated $500 billion in cuts that would be required on top of the $450 billion already in the works.

In a letter to Murray and Rep. Jeb Hensarling, R-Texas, the GOP chairman of the supercommittee, the head of the House Armed Services Committee warned of "immediate, dire and in some cases irrevocable" damage to the nation's military. "Our ability to respond to national security crises or humanitarian disasters would be disrupted," added Rep. Howard P. (Buck) McKeon, R-Calif.

Republicans familiar with the GOP plan said it included $543 billion in spending cuts, fees and other non-tax revenue, as well as the $3 billion corporate jet provision. There also would be $98 billion in reduced interest costs.

Officials familiar with the offer said it would save the government $121 billion by requiring federal civilian workers to contribute more to their pension plans, shave $23 billion from farm and nutrition programs and generate $15 billion from new auctions of broadcast spectrum to wireless companies.

It also would claim about $100 billion in savings from Pentagon civilian personnel costs and another $35 billion by increasing the fee that mortgage giants Fannie Mae and Freddie Mac charge lenders to guarantee repayment of new loans. The fee increase would add $15 a month to the monthly cost of an average new mortgage.

The per-ticket security fee to pay for Transportation Security Administration operations at the nation's airports would increase, and $18 billion would come from savings within Postal Service accounts.

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Associated Press writer Donna Cassata contributed to this report.

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