In the space of a week — Nov. 10-17 — two blue-ribbon panels proposed tough-minded proposals for reining in our federal budget deficits.
President Barack Obama appointed the bipartisan White House Fiscal Commission. The group’s chairmen, former Sen. Alan Simpson, R-Wyo., and former White House Chief of Staff Erskine Bowles are inside-the-beltway heavyweights.
The other group is headed by former Senate Budget Committee Chairman Pete Domenici, R-N.M., and former White House budget director Alice Rivlin.
The two commissions’ primary mission: get the federal debt down to 60 percent of gross domestic product in order to fix our unsustainable fiscal course.
Globally there exists a general consensus that America needs to take remedial fiscal action over the near term. According to the International Monetary Fund, America’s structural deficit is among the worst of the developed countries. China, Germany, and Brazil have expressed concerns regarding American IOUs.
Our creditors could either stop lending us money or demand much higher interest rates, as they have in Greece, Ireland and Portugal.
Washington today is polarized. The left and right would prefer to defend their own sacred cows rather than exploring compromises to achieve needed reforms.
America has good and bad excuses for not immediately redressing our deficits.
The good one: Because we suffer from a fragile economy, we do not want to impose cutbacks that would cause a double dip back into a recession. Economic growth in the second half of 2010 slowed to an anemic 2 percent annual rate. The unemployment rate, at 9.6 percent, remains near its peak. In a November CBS News poll, 56 percent of respondents believed that Congress should primarily focus on the economy and jobs. Only 4 percent thought the deficit should be its priority.
The bad reason for delay: America’s political culture resists austerity. In recent years, we have undertaken wars in Iraq and Afghanistan, expanded dramatically entitlement benefits such as the Medicare prescription drug benefits, and launched fiscal initiatives costing trillions of dollars without enacting tax increases to defray these added expenditures.
To cut to the quick, the federal government has overspent on defense and made unaffordable commitments, particularly in the area of entitlements — Social Security, Medicare and Medicaid. To achieve fiscal responsibility, the Simpson-Bowles commission hopes to get about 70 percent of its deficit reduction from spending cuts. Domenici-Rivlin targeted slightly more than half.
We need to tackle the following to make fiscal headway:
Cut the number and salaries and benefits of federal workers.
educe the costs of our health care system.
ncrease the age of Social Security eligibility.
ecrease defense and foreign policy spending.
educe entitlements, including farm subsidies, civilian and military federal pensions and student loan subsidies.
Both commissions sought to cut top personal rates and corporate tax rates from today’s 35 percent to about 26 percent.
To raise added revenues, the groups advocated eliminating loopholes and tax breaks that cost $1 trillion per year in foregone revenue, such as mortgage interest deductions and credits for employer-provided health insurance.
Both commissions advocated higher taxes on consumption.
Simpson-Bowles proposed raising gasoline tax from 18.4 cents to 33.4 cents per gallon. Domenici-Rivlin advocated a 6.5 percent value-added tax, a levy on the estimated market value added to a product or material at each stage of its manufacture or distribution.
Is fiscal reform a political death sentence?
Research by Alberto Alesina of Harvard University found that contrary to political wisdom, members of governments that enact austerity measures are often re-elected. There are examples from Denmark in the early 1980s and Canada in the 1990s. Here in the United States, President Bill Clinton was re-elected in 1996 after raising taxes in 1993.
Domenici believes that our present fiscal challenges are the greatest threat that the country has faced since Pearl Harbor.
Using military metaphors, the former senator said, “America is on the threshold of potential economic devastation. The day of infamy is close.”
Domenici understands that fiscal reform should be more than an accounting exercise. We need to set national priorities, weigh competing concepts of fairness and create incentives to promote growth.
Originally published in the Sarasota Herald-Tribune
