The Century Foundation, Demos and the Economic Policy Institute have released a liberal counterpoint budget plan, as a response to the plan put forward by Erskine Bowles and Alan “The Greediest Generation” Simpson on deficit reduction.
The report, entitled “Investing In America’s Economy,” makes its first bold statement at the beginning – there should be no spending reductions until unemployment hits 6%. This is fundamental to a different worldview about the budget, which believes in people first over deficit hysteria. Moreover, the budget deficit once unemployment is at that stage is a much different animal than the deficit currently, as economic growth happens to be the greatest deficit reducer there is.
Debt can be stabilized afterwards, but only if investments are made up-front that support long-term economic and job growth. Those investments are cheaper in the near term than their dollar amount, just as spending cuts will prove quite expensive down the road.
To deal with any deficit, revenue increases must be looked at over the long-term, and that simply means targeting the people who can most afford it, who take up a larger share of the commons, to pay for the increases. Right now virtually all the revenue boosts in Simpson-Bowles and most of the other plans out there are regressive; a VAT tax operates like a sales tax, and reductions to the top tax rate produce a flatter tax system even by eliminating most tax expenditures and broadening the base.
My favorite core principle is this:
No cost shifting. Debt reduction must be weighed against other economic priorities. Policies that simply shift costs from the federal government to individuals and families may improve the government’s balance sheet but would worsen the condition of many Americans, leaving the overall economy no better off.
Private debt has actually fallen a bit during the Great Recession, as the savings rate has gone up and individuals deleverage. Many of the Simpson-Bowles recommendations would just cost-shift and alter the balance between public and private debt, with no effect on the economy at large. The cost burden goes from the government to individuals, but the wealth transfer goes from those individuals to the entities doing the financing, namely the major banks, who get a better yield on individuals than from the government. We always have to keep that in mind.
The Our Fiscal Security plan (the umbrella title) realizes primary budget balance by 2018, but spends money on investments throughout, eventually offsetting them through defense savings (about a trillion dollars in cuts over the next decade) and revenue increases, the latter up to $450 billion annually by 2020. The revenue increases do not begin until 2014 and get phased in over time. By 2020, revenue would be at 21.7% of GDP, with spending at 25%, producing a manageable deficit. And no safety-net programs are touched in the exchange. This also stabilizes the national debt at 90% of GDP by 2025, adding that “debt at these levels is within historical and international experience, and has not been shown to represent a drag on economic growth.” The total deficit solutions are well within the range of what Bowles-Simpson offered.
The report recognizes that long-term health care costs are 98% of the deficit problem, and offers a number of cost-reducing strategies that go further than the Affordable Care Act, including accountable care organizations, bundling payments (where a patient pays for wellness over time, approximately, rather than fee for service), comparative effectiveness reserach, incentives to increase patient safety at hospitals, and a robust public option. On Social Security, the report mostly calls for an increase to the payroll tax cap to fill the long-term gap.
Public investment in areas like early childhood education, child care, infrastructure, mass transit, rural broadband connectivity and research and development would yield a major return on investment and pay back over time.
The plan reduces tax expenditures, makes law the Bush tax cuts on the first $250,000 of income while allowing the rest to expire, extends the “Making Work Pay” tax cut of $400 per individual from the stimulus, and adds revenue enhancements like a millionaire’s surcharge, a carbon tax and a financial speculation tax.
It’s a pretty good report, with a vision of how to create the best economy in the next decade, not merely how to fill in numbers in a ledger book.