It’s kudos to President Obama’s Debt Commission co-chairs for clearly outlining the gargantuan size of the fiscal problem facing the United States. The reforms will re-direct the exploding debt trajectory downward by reforming taxes and cutting spending – reminiscent of recent fiscal reforms in the United Kingdom. Unfortunately, history is likely to repeat itself: Even if they are enacted soon – which seems unlikely – chances are bleak that we’ll stick with them for long enough to achieve their stated goals.
The Debt Commission co-chairs have done a stellar job in framing the nation’s fiscal challenge and placing it squarely before the American public. The contrast between the current trajectory that increases the national debt beyond 80 percent of GDP by 2040 and one of declining debt under their reforms likely to be consistent with long-term economic growth because the Commission also proposes limiting government spending to 21 percent of GDP – is striking.
The Commission has marked wide-ranging reforms – to broaden the federal tax base, reduce income tax rates and simplify the tax system; cut discretionary expenditures that are unaffordable and antiquated in all spheres; reduce long-term health care cost growth, and restore Social Security to financial solvency through a combination of benefit cuts and revenue measures.
It’s sad but true that the political barriers stacked up against this promising approach appear to be insurmountable. Given the make-up of Congress and with Obama as President, the chance that something even remotely resembling the Commission’s proposals would be enacted is negligibly small. With the Democratic majority in the Senate, President Obama is unlikely to even have to use his veto.
But what if my conjecture is proved incorrect and a roughly similar set of reforms is enacted in 2011? Remember that our fiscal problem is of a long-term nature. It is produced by an aging population; rapid health care cost growth; slower revenues from a flagging economy as a large cohort of experienced workers retires; slowing education and skill acquisition by younger workers; and slower capital formation as more resources are consumed by an aging population. The commission’s reforms have to be enacted and maintained for at least 30 years to deliver its “target” debt-to-GDP ratio of 40 percent. History tells us that such an outcome is quite unlikely. For example, the Budget Enforcement Act of 1990 – that helped President Clinton accumulate his now much touted laurel as a fiscal conservative – was maintained for just 12 years – until Congressional Budget Office projections revealed “budget surpluses as far as the eye could see” in 2002. With those projections in hand, lawmakers raced to the exits: the BEA was abandoned and federal spending shot through the roof. Even as conservative a policy maven as Alan Greenspan shone a green light to adopt budget busting tax cuts.
To improve the chances that history does not repeat itself, the commission’s proposals need to be combined with proposals to reform the budget process. The first thing to consider on that score is to use better budget measures to assess if reforms are achieving their goals. Stating those goals in terms of the national debt and annual cash flow deficits is unlikely to work – just as those measures have not worked for the European Union in the context of their now defunct Stability and Growth Pact.
Federal debt and the current budget deficit that is reported on the government’s books is the result of past policies and outcomes. They summarize where we came from, not where we’re going. If the commission’s reforms are enacted, a better method would be to anchor judgment about their success on the size of prospective debt—the value in today’s dollars of all future deficits that the federal government would incur under the new policies; alternatively under premature abandonment of those policies – as happened in 2002 when the BEA was abandoned. It is also important to know whether the sacrifices that the commission’s policies require from today’s generations are fairly distributed and are being invested for the future rather than being dissipated. For example, will the Social Security surpluses that the reforms generate be effectively saved and invested, or would they promote additional government spending as in the past? Without a budget process that delivers real investments for the future, and without metrics to measure their operation properly, chances are that even if Congress and the President enact them into law next year, the reforms will be abandoned too soon.