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Ask The Experts: If I Could Make One Policy Change to Fix the Federal Deficit, I Would…

Policy Changes To Balance The Federal Deficit

One of the most pressing issues facing our nation these days is the federal government’s massive budget deficit.  The deficit and its implications for the already prodigious national debt have been front and center in the national discourse as a $315 billion surplus in 2001 has gradually transformed into an $885 billion deficit in 2013 under the weight of tax cuts, healthcare policy changes, and spending tied to the War on Terror, Wall Street “bailouts,” the 2009 economic stimulus, and the oft-forgotten interest continuing to accrue on amounts already owed.  With each looming debt ceiling, fiscal cliff, and sequester, the unfortunately partisan debate gains vigor, begging the question of whether we’ll find a solution before we run out of nifty nicknames for the various kick-the-can crises encouraged by our infighting and indecision.

There are plenty of proposed solutions out there – both practical and inane – coming from a variety of sources – from the Brookings Institute to Esquire Magazine’s Commission to Balance the Federal Budget.  But evaluating the efficacy of a potential remedy, of course, necessitates making a proper diagnosis first.

So, what is the current state of the federal government’s debt and deficit?

Scoping the Problem

With so much talking-head, blogger-fueled misinformation and white noise out there concerning the budget deficit, it’s no surprise that most people either don’t know or don’t really care anymore what the latest facts are.  For example, while 62% of Americans believe the deficit is growing this year and 28% think it will hold steady, according to a Bloomberg poll, only 6% were on the money in saying the gap is actually narrowing.

The annual divide between government spending and government revenue actually receded by $300 billion during President Obama’s first term.  It currently stands at $845 billion for fiscal year 2013 and is expected to fall to $430 billion next year.

Nevertheless, the national debt (and no, I’m not referring to Washington Nationals SP Ross Detwiler’s Twitter handle) has continued to grow (actually, much like the 27-year-old lefthander, who’s turning into one of the best young pitchers in MLB).  As a nation, we’re currently over $16.8 trillion in the hole – roughly 191% more than was owed in April of 2000, 116% more than in April 2005, and 7% more than this time last year, according to data from the Treasury Department.

Those figures are certainly staggering, but they seem even more worrisome when you consider the following:

  • $1.22 trillion:  The amount of U.S. debt owned by China, according to Treasury data (~7% of total amounts owed).
  • $191.9 billion:  The amount of interest that accrued on the national debt during the first six months of fiscal year 2013 (which began in October).
  • $3.85 billion:  The average amount by which the national debt has grown each day since 2007.

Simply reducing the budget deficit isn’t going to cut it.  Drastic measures must be taken to not only balance the budget, but also pay off much of what we already owe.  After all, a revamped personal budget could help indebted consumers lead a financially sustainable lifestyle, but if they only ever send creditors minimum payments, they’ll never reach debt freedom.

But while you can use a credit card calculator to figure out what monthly payments you’ll need to make in order to reach zero balance by a certain time and even identify which credit card will save you the most on finance charges, things are a bit more complicated when it comes to the federal budget.

So, what can we do?

Proposing a Solution

As mentioned previously, there’s no shortage of espoused fixes to the country’s money problems.  Some rely heavily on spending cuts, while others are more revenue-focused.  Some come from reputable sources, others from amateurs.  Which approach is “right” or “best” is obviously a matter of great debate.

In order to gain a bit of added insight into the matter as well as perhaps advance the overall discussion, we asked a number of experts for their take.  More specifically, we posed the following question to professors of economics, public policy, and finance from many of the country’s leading institutions of higher learning:

If you could make one policy change to solve the federal government’s deficit problem, what would it be?

Here’s what they had to say about proposed solutions and the likelihood they’ll actually be adopted:

Ask The Experts

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Fred Thompson

Grace and Elmer Goudy Professor of Public Management and Policy Analysis; Director, Center for Governance and Public Policy Research Willamette University

Policy Change: Make every possible productive expenditure that presents itself as long as the Treasury can borrow money for free, including cutting SS taxes and maintaining food stamps and EITC.
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Bruce Yandle

Dean Emeritus of Clemson University’s College of Business & Behavioral Science, Distinguished Adjunct Professor of Economics at the Mercatus Center at George Mason University, and formerly Executive Director of the Federal Trade Commission and Senior Economist on the President’s Council on Wage and Price Stability

Policy Change: Redesign Obamacare by removing corporate income tax deductibility of healthcare fringe benefits and forcing a national market for healthcare insurance.

Likelihood: Slim to none.
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Joseph White

Chair of the Department of Political Science & Director of the Center for Policy Studies at Case Western Reserve University

Policy Change: Well, no single measure could be more than a small piece of a package, so I interpret the question as, ‘of the things that could be meaningful parts of a package, which are the best policy in their own terms?’

The most obvious are having a real public option for health insurance within the exchanges, and getting rid of the carried-interest treatment of income. The latter could be incorporated in a much larger change – treating capital gains like other income. Or at least reducing the difference.

Other people of course have different policy preferences. Mine start from the fact that it really is true that income has skewed dramatically to the top 5 or 1 percent of the society in recent years, for no particularly good (or fair) reason.

Likelihood: Those two have a snowball’s chance in Florida, not hell. You would need to have the Democrats actually gain seats in the 2014 election based on a somewhat populist campaign. Doesn’t seem very likely.
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Antony Davies

Associate Professor of Economics at Duquesne University

Policy Change: I would cap Federal spending at 18% of GDP. Historically, regardless of whether tax rates are high or low, the Federal receipts (from all sources) total about 18% of GDP. In addition to balancing (on average) the budget, this change would alter how the Federal budget is negotiated. Currently, negotiations involve weighing the political benefit of additional spending against the political cost of either increased taxes or increased deficits. Under this plan, negotiations would involve weighing the political benefits of additional spending in one area against the political cost of reduced spending in another area.
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David Primo

Associate Professor of Political Science and Business Administration & Director of Graduate Studies in Political Science at the University of Rochester

Policy Change: I would add an amendment to the U.S. Constitution restraining the federal government’s ability to spend more than it takes in and making large deficits the exception rather than the rule.
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Sally Wallace

Chair for the Department of Economics at Georgia State University

Policy Change: Restructuring the individual income tax so it could grow with the economy (broaden the base, lose the deductions, etc.).

Likelihood: 50% chance of a 50% improvement.
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Alice Rivlin

Senior Economic Studies Fellow at the Brookings Institute; formerly a member of the President’s Debt Commission, founding director of the Congressional Budget Office, and Federal Reserve Vice Chair

Policy Change: It is impossible to make just one policy change, because two are necessary: (1) entitlement reform that will reduce the rate of growth of federal spending and (2) tax reform that will produce more revenue.

Likelihood: I am moderately optimistic that a bipartisan compromise will be hammered out this year that will at least make a start on both. The reports of the Simpson Bowles Commission and the Domenici Rivlin Task Force are bipartisan blueprints that illustrate possible policies.
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Jeffrey Frankel

Professor, Department of Marketing, Metropolitan State University of Denver

Policy Change: Return to counter-cyclical fiscal policy (surpluses during booms, deficits during recessions) instead of the pro-cyclical policy of the last ten years.
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John Gilmour

Paul R. Verkuil Term Distinguished Professor of Public Policy at The College of William & Mary

Policy Change: There is no one change that is particularly important. The best approach to deficit reduction is always balanced and multi-pronged. Putting together a large number os smallish changes in revenue and expenditure can yield impressive deficit reductions. This was the approach used repeatedly and successfully in the 1980s through 1993.
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John Ellwood

Professor of Public Policy at the University of California, Berkeley

Policy Change: The correct package would include (1) an increase of the revenue burden to what it was at the end of the Clinton Administration. (2) The passage of legislation to control health care expenditures — in both the private and the public sectors. (3) Passage of changes to Social Security program so that it is in balance over the 75 year time line. These changes should be phased in so that they will not thwart the recovery but would take effect over the long term. The Social Security problem is not nearly as serious as the health care sector problem. The US spends 18 percent of its GDP on health care. Those dollars are someone’s income and those folks will fight to the death to maintain their income.
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Meg Streams

Assistant Professor of Public Administration at Tennessee State University

Policy Change: Pick a budget process and stick to it, on time. And then, do it again next fiscal year, on time. And the next…even if sticking to the process means you don’t get everything your way, regardless of your position on the political spectrum. You get the idea!

The Federal budget process was already sufficiently byzantine to allow for all kinds of gamesmanship – yet, we haven’t shown that we can reliably follow even that process consistently and on time for years. Norms about budgeting at the federal level have decayed to the point where it is not clear that they exist. This erosion of the process itself worries me more than the size of the deficit at any given time. Disturbingly, we are beginning to look like a society that cannot predictably execute the routines of governing – and that does not engender faith in our economy. As long as ours seems to be in marginally better shape than others, we get by. Should we reach a point where that is no longer the case, the absence of commitment to do the work of government will be less of an embarrassing sideshow and more of an alarming main event. Budgeting is a foundational aspect of government, regardless of how minimal a state you prefer.

Likelihood: It doesn’t look good. My desired change, strictly speaking, is not a policy itself but rather a change in attitudes about the process of budgetary policymaking – and it has never been clear how to legislate changes in attitudes. I can only hope the ignominy of appearing to our citizens, and the world, as a nation that cannot manage its fiscal affairs in a routine, regularized fashion eventually changes the way our policymakers work with each other to carry out these basic functions.

Eying an Outcome

 
Whatever option(s) policymakers decide to pursue, it’s clear that our budget deficit issue isn’t going to get solved overnight.  After all, if we can’t even agree on a budget for this fiscal year, how can we expect to implement the types of sweeping changes that are, by all accounts, necessary?

We can’t.  The political climate has to change first.  That will take time and a lot of work.

In the meantime, tell us what you think the government should do to correct the budget/debt mess?  Just remember to keep the partisan politics to yourself and instead focus solely on constructive suggestions!
 
Image: Sergey Nivens/Shutterstock

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