How Would You Tame the Debt?

Show of hands, please: Do you think you can do a better job with the federal budget than our leaders in Washington?

OK everyone, put your hands down. And put that confidence to the test by clicking over to the new Stabilize the Debt exercise from the Committee for a Responsible Federal Budget.

The exercise gives you a goal–getting the federal debt down to 60% of GDP by the end of 2018–and a lengthy menu of policy options that you can use to get there.

How tough is this? Pretty hard. The CRFB’s baseline has the debt at 66% of GDP in 2018, implying that we need $1.3 trillion in spending cuts and tax increases to hit the 60% target. But that’s assuming that all the 2001 and 2003 tax cuts expire at the end of the year and that discretionary spending will grow only at the rate of inflation over the next decade.

As a political matter, a more plausible baseline might be to assume that the tax cuts get extended except for high-income folks and that Congress enacts the President’s proposed levels of discretionary spending. In that case, the debt would be 82% of GDP in 2018. And you, the beneficent budget dictator, would have to find $4.6 trillion in spending cuts and tax increases.

Just for fun, here’s one way you might get there:

  • Reduce the number of troops in Iraq and Afghanistan to 30,000 by 2013
  • Make a variety of other defense spending reductions
  • Raise the Social Security normal retirement age to 68
  • Gradually reduce scheduled Social Security benefits through 2080
  • Use an alternate (i.e., lower) measure of inflation for Social Security COLAs
  • Include all new state and local workers in Social Security
  • Increase Medicare cost-sharing and premiums
  • Reduce spending on graduate medical education through Medicare
  • Enact medical malpractice reform
  • Increase the Medicare eligibility age to 67
  • Reduce Medicaid spending to higher-income states
  • Reduce farm subsidies
  • Cut assorted other spending (is anyone not going to cut “certain outdated programs”?)
  • Enact a carbon tax
  • Increase the gas tax by 10 cents [I was surprised CRFB didn’t have an option to raise it more]
  • Raise the Social Security tax cap to cover 90% of earnings
  • Index the tax code to an alternate (i.e., lower) measure of inflation
  • Sell government assets
  • Reduce the tax “gap”
  • Replace the mortgage interest deduction with a flat credit
  • Curtail the state and local tax deduction
  • Replace the exclusion for employer-provided health insurance with a flat credit
  • Limit itemized deductions for taxpayers with high incomes
  • Eliminate subsidies for biofuels

And that doesn’t leave room for any spending increases or tax reductions that you might want.

Good luck.

4 thoughts on “How Would You Tame the Debt?”

  1. When you think the problem through, only three real solutions exist to the national debt problem:

    1. Cancel national debts (the default route)
    2. Cut spending and raise taxes (the austerity route)
    3. Print money (the inflation route)

    A fourth option might be some combination of the three. However, enacting all three of these measures at once is unlikely to occur in democractic governments.

    Now, given that government can never risk losing its borrowing power, the default option becomes remote. Moreover, given that the people will never consent to significant cuts in programs or dramatic increases in taxes, the austerity route is equally remote. Thus, printing money (or the inflation route) becomes the most likely way forward (whether we like it or not) — history vindicates this claim.

    My advice to workers in the private enterprise is to own houses on fixed mortgages and get rid of any variable rate paper you are holding, including credit cards. Also, avoid making unnecessary purchases until further notice (as in new cars and appliances). In the end, inflation is not all that bad if you can keep a job…

    My advice to workers in the public sector is to prepare for disaster and ruin — once the government embarks on the inflation route, cost-of-living increases in pay and benefits will never keep up. Even a 6-9% inflation rate over 7-10 years means up to a 40% cut in real wages (and pensions) for the public sector. Again, plan accordingly…

    More at:

    http://wjmc.blogspot.com/2009/12/using-inflation-to-erode-us-public-debt.html

    http://wjmc.blogspot.com/2008/12/implications-of-financial-crisis.html

    Thanks for the opportunity to comment, and good luck to the everyone, and let’s hope my predictions prove wrong…

  2. This model is all static analysis. There will be no real growth under the Administration plan, and you will be at 100% of GDP debt. People are already battening down the hatches, and increasing the percentage of their business activities that are tax motivated, or reflect a changed risk/reward equation. Its happening as we speak, big time.

    Taking marginal tax rates to 55% state and federal, maybe even 60%, will kill the economy. Throw in another 10% in means tested voluntary expenditures (private and university education, opt out health care), with some tax planning, some quitting, and some old fashion evasion (and the impending Greecification of California, New York, and Illinois) and you discover there is only one way out, and that is growth.

    The federal government has to live on 20% on GDP, whatever choices that implies, and it has to raise it at rates that don’t discourage saving or investment. We are already at the highest rates that are consistent with growth.

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