Two Visions for Our Economic Future: Grow the Economy or Shrink the Debt?

by Paul Ballard
March 1, 2013
Listening to the strident voices on both sides of the “Sequester” debate makes me think of the choices we face as a nation and how these compare to the challenges of running a business.
Imagine you became CEO of an NFL team taken over in a leveraged buy-out. The good news is: It is a marquee name, won two Super Bowls in years past, and is in a rapidly growing metro area with a strong fan base. The bad news is: The new owners raised a big debt to buy the team. As CEO, your major challenge is: Do you grow the franchise in terms of revenues, by building and capitalizing on the team’s assets? Or, do you pay down the debt, by selling off star players and cutting the farm squad, scouting and recruitment?
The current national fiscal debate, poses a similar choice: Do we focus upon promoting sustained high economic growth? Or, do we prioritize deficit and debt reduction, believing this will bring greater prosperity?
Both President Obama and the Democrats, and Speaker Boehner and the Republicans – despite their loud partisan differences – aim to reduce the U.S. Federal deficits and spending. They just seem to differ widely on how to accomplish this. Obama and Democrats seem to consider we Americans need to pay a bit more for our government to cover key public services. Boehner and Republicans seem to believe we should just cut the services and pay less – smaller government will create more space for private initiative to grow the economy, they say.
But are these realistic options? Do they really reflect the reality we and our politicians have lived in the past? How well do recent proposals – notably the 2010 Simpson-Bowles commission and its recent update – provide a blueprint we could follow? And how would the “Sequester” contribute to and impact public services?
The 2010 Simpson-Bowles commission gave specific cost proposals to reduce Federal spending and raise Federal tax revenues to achieve a long-term balanced budget, with the Federal Government representing about one-fifth (21%) of the U.S. economy. This is consistent with historical trends when there was a balanced budget.
To do so, Simpson-Bowles proposed: reducing Federal spending on all civilian and military activities by about 12-17% during 2012-20; capping increases in Medicare and Medicaid spending to contain costs, while rationalizing care; gradually raising Social Security retirement age to 69 by 2075, and making contributions and benefit pay-outs more progressive to further assist disabled and disadvantaged; raising Federal tax revenues by reducing income tax offsets and cutting rates (to a maximum 29%), reducing the corporate tax rate (to 28%), eliminating the capital-gains offset and raising the U.S. gasoline tax. All this was designed to yield $4.1 trillion in spending reduction and $2.5 trillion in additional tax revenues through 2020.
Simpson-Bowles represented a commendable effort to tackle the U.S.A.’s long-term fiscal challenges. But, from its publication, it attracted much partisan controversy. Republicans considered it raised taxes too much. Democrats thought it neglected key spending priorities. Ultimately, though, Simpson-Bowles earned significant, if grudging, support.
In February 2013, Simpson and Bowles proposed modified deficit reduction measures, based upon their 2010 report. These involve: half the previously proposed increase in tax revenues ($1.3 trillion through 2020); greater health-care savings; and substantially ($1 trillion) less deficit reduction. The aim is a compromise position for a political deal. Simpson Bowles, rightly in my view, stress phasing in the spending reductions and tax increases gradually to avoid slowing the still fragile US recovery. They, quite correctly, stress avoiding the foolish damage and disruption that across-the-board cuts under the “Sequester” would cause.
Despite its strengths, Simpson-Bowles’ original and now revised proposals entail substantial drawbacks for promoting long-term economic growth and resurgence of broader middle class prosperity.
By starting from a 2010 baseline to cap all Federal expenditures, military spending is maintained at its unusually high wartime level (around $700 billion annually). Meanwhile civilian spending is capped at a lower level – including for infrastructure, education and basic research. Yet, Simpson Bowles acknowledge the crucial importance of these for US’ long-term economic rebuilding and growth. With the end of the Iraq and Afghanistan conflicts in 2014, the USA will be at peace. Strengthening long-term national defense now calls for rebuilding US economic competitiveness. All the more so as, since 2009, K-12 and college education has been substantially cut back. And the USA faces a $2 trillion backlog in basic infrastructure maintenance. Simpson-Bowles provides no additional funding to meet these needs.
A key weakness of the Simpson-Bowles approach, in my view, is that it targets only deficit reduction as a long term goal. It consequently low-balls economic growth. It does not consider how prospects for growing our economy in the future could be greatly enhanced through bolder investments sooner in skills and education, infrastructure and basic research. These are key “public goods” because private supply alone is high cost and inadequate.
This is a major short-coming shared by budget proposals of both President Obama and the Democrats and Republicans. In the second half of the 20th century, U.S. global economic leadership and competitiveness were based upon just such investments. In a globalized market, where competition for traditional blue-collar manufacturing jobs is now fierce, and emerging markets are more competitive, the USA surely needs to give top priority to maintaining its high-tech competitive edge.
Like the incoming CEO of our NFL team, if we believe in our future, we will make these investments now, to ensure our long-term success. To achieve this, within budgetary limits, I think all U.S. Federal government outlays – both military and civilian – should be assessed in terms of their benefits to our economy and future prosperity, rather than revised from an arbitrary starting baseline.
To enhance private business incentives, Simpson-Bowles rightly propose lowering corporate tax rate. But their proposed 28% rate is still far too high for a level-playing-field for small vis-a-vis currently vastly more favored big business, which often pay well below the current 12% average rate. However, capping Federal spending at 21% of the US economy should meet Republican goal of promoting private business since historically the US economy has achieved high (4-5%) growth on this basis.
Because it focuses narrowly on budget issues, Simpson-Bowles does not consider – as it should – other policies that could be instrumental to controlling spending. Private market reform to reduce inefficiency and high costs in US private health care by promoting competition among providers and insurers could also significantly reduce Medicare and Medicaid costs. These could build upon the private exchanges to be set up under Obamacare.
The acrimoniousness of the budget wars in Washington belies realities in so-called “red” states (where Republicans, we are told, believe in lower taxes and less government) and “blue” states (where Democrats, supposedly, favor higher taxes and more government). During 1990-2009, “red” states benefited from higher funding from the Federal Government than blue states. Twenty-two “red” states had a total deficit in Federal spending they received over taxes paid of $2.4 trillion – or fifteen per cent of today’s national debt! Meanwhile, five “blue” states are large net contributors to the Federal Government. However, the deficit “red” states almost all voted in 2012 not to raise taxes under the last minute Fiscal Cliff deal!
As the continuing recession in Europe shows, promoting vigorous economic growth is far superior to “austerity” as an economic strategy. If we want our newly acquired NFL team to recapture the Superbowl, a bold growth strategy will be needed! I, for one, hope that our political leaders realize this in a very short time now!