What to do about the deficit and the debt? These are issues swirling about Washington this fall as three commissions, including a bi-partisan commission appointed by President Obama, are releasing their reports and seeking the attention of both policymakers and the public.
The large annual deficits the federal government has been running since 2001 result from tax cuts for the wealthy, the waging of two wars, and the recession, which resulted in massive job loss and lost revenues to governments at all levels. The best cure for the short-term deficit would be restoring jobs and economic growth—the federal government should increase its borrowing in the short term in order to stimulate the economy further and generate more jobs. This course and strong economic growth will reduce the deficit faster, and with fewer ill effects, than any other course of action.
But there is still a looming long-term problem, in which expected expenditures will outpace expected future revenues according to Congressional Budget Office projections. Chief among the reasons for long-term growth in expenditures is the high and rising cost of health care in the United States. Relative to other countries we pay twice as much per capita but have worse health outcomes. By including several provisions to contain costs, the recently enacted heath care reform clearly moves us in the right direction, but more could be done. Allowing the federal government to negotiate with drug companies is one obvious improvement; another suggested by the Center for Economic and Policy Research would be to recognize that most research leading to new drugs is heavily subsidized by the federal government and thus patent protection for drugs should be severely limited.
Another long-term problem that should be addressed is our continuing underinvestment in the nation’s infrastructure needs, both in human capital and physical capital. Other nations are eclipsing the U.S. in graduation from college, for example, and many have such transportation advances as high-speed rail.
Unfortunately all three of the debt commissions seem to be recommending artificial limits to the size of the federal government, regardless of the nations’ needs or its citizens’ desires. None seem to be considering several alternative forms of taxation that could raise substantial revenues, such as a tax on Wall Street transactions or a carbon tax. And all three seem to be recommending that Social Security benefits be cut, even though Social Security does not contribute to annual deficits or the accumulated debt, since it is not allowed to borrow to pay benefits. Each one-year increase in the retirement age amounts to a 7 percent cut in benefits.
To prepare for the retirement of the baby boom, the Social Security system has accumulated a surplus of $2.6 trillion (in 2010) in its Trust Fund, which is expected to grow to $4.2 trillion by 2025. Through 2037 Social Security is projected to be able to pay all benefits in full. At that time, the Trust Fund is expected to be exhausted, if no changes are made in Social Security, and benefits would have to be reduced to about 75 to 78 percent of current law benefits. This long term funding gap in Social Security should be addressed, in order to ensure that benefits can continue to be paid in full.
Yet the commissions are recommending cuts in benefits rather than sufficient revenue increases. The revenue enhancer most popular with the American people is removing the cap on the amount of wages subject to the payroll tax (currently set at $106,800). Depending on how this proposal is implemented, enough funds can be generated to increase, not decrease, benefits.
Social Security should be off the table when the budget deficit is being discussed. A serious conversation about the long-term budget situation is needed, but it should be one that prioritizes getting our economy back on track and making the investments we need to maintain our productivity in the long run.
Heidi Hartmann, President, IWPR