"Deficit Panel Floats a Trial Balloon - A Good Start"

Sydney M. Williams

Thought of the Day

“Deficit Panel Floats a Trial Balloon – a Good Start”

November 12, 2010

In thinking of the deficit it is important to admit, understand and accept certain facts. First, the level of current spending and the size of the deficit, as a percent of GDP, are unsustainable. Second, no matter how wasteful a program or how errant an earmark, someone gets hurt when that program is defunded or the earmark voided. One person’s waste is another’s “essential” program.

With that as a background and against the odds usually associated with Washington’s blue ribbon panels, the draft from the eighteen-member deficit commission was remarkably sane. Democracies function when people of opposing views tailor their opinions to conform to an outcome acceptable to the majority. The draft and the recommendations – supposedly due out on December 1st – are not meant to be the last word, but as a starting point for debate. Of course, Washington being Washington, the hurdles to accepting anything close to the draft may prove insurmountable.

For most of the past fifty years the United States has operated with a deficit, but generally it has been manageable, with federal expenditures running just over 20% per year and revenues just under 19% per year. Recessions curtail revenue; resumption of growth increases revenue. Recessions cause federal expenditures to increase. Creating an environment to encourage private sector economic growth is generally the most efficient means of getting the deficit under control – rising earnings generate more tax revenue. But what happened in 2008-2010 was outside the parameters of normal bounds. Revenues declined to less than 15% of GDP, while expenditures reached 25%. But the increase in expenditures was also due to the Obama administration aggressively taking advantage of the crisis to enlarge the reach of government.

The draft presented by Erskine Bowles and Alan Simpson, co-chairmen of the deficit commission, would achieve its goals through spending cuts of three dollars for every dollar gained through tax increases. As would be expected, partisans on both sides of the aisle, but especially the Left, attacked the proposal. In fact, when Speaker of the House Nancy Pelosi called the proposal “unconscionable” and “unacceptable”, the President felt the need to call her out and suggest everybody read the fifty page proposal before commenting. At the same time, any tax increase is an anathema to conservative Republicans.

Aspects of the draft that I find refreshing includes the concept of lowering and simplifying both individual and corporate tax rates, while limiting deductions. Raising the level on which payroll taxes would be levied should not prove overly onerous; on the other hand waiting sixty-five years before raising the retirement age to 69 seems absurd. In an attempt to curtail the role of government in the economy, the proposal suggests that spending and revenues should not exceed 21% of GDP. I would prefer that government’s share be smaller, but as a guideline the number is useful.

Whatever is ultimately decided should be a proposal that recognizes the importance of the private sector in growing the economy; it should acknowledge the aspirations of the young and less affluent; it should encourage investment and discourage consumption; it should recognize the importance of trade to our economy and a realistic appraisal of our role in a changing world.

The importance of the panel and its recommendations will become clearer once interest rates rise, as they inevitably will. It is hard to believe that, in terms of interest rates, we are living in a time of grace, but we are. The deficit in 2011 is projected to be 10% of GDP, between $1.4 and $1.5 trillion, with total debt around $14 trillion. Interest rates are at historically low levels with an average maturity around five years. Unless that debt is reduced, an increase in rates will make today’s environment seem easy by comparison.

So I commend the President on having established the commission and I commend the commission on its draft. In stark contrast to the Group of 20 meeting in Seoul, which reached no conclusion regarding the frightening prospect of currency wars other than establishing “early warning indicators”, the deficit commission presented some real choices. However, the draft is just that, a draft. But it is a good starting point for debate.

Businesses, responsible to fewer constituents than government, make tough decisions like this every day. However, the Obama administration suffers a want of people with private sector experience. A failure to make the decisions necessary will be indicative of letting special interests take precedence over the good of the country. Contrarily, a willingness to make tough decisions is a mark of a strong leader.

A reasonable outline has been provided Congress and the administration. The next few months will be telling.