Our Dire Fiscal Situation II A Promising Solution


As I discussed in my last post, the Congressional Budget Office has shown very clearly that the U.S. is on an unsustainable fiscal path which must be reversed in order to avoid calamity.  We are spending too much money and not taking in enough tax revenue.  In a recent Wall Street Journal Op Ed column, the economist Martin Feldstein describes “How to Create a Real Economic Stimulus”.  “A successful growth and employment strategy would combine substantial reductions in the relative size of the future national debt with immediate permanent tax rate cuts and a multiyear program of infrastructure spending…….The only way to reduce future deficits without weakening incentives and growth is by cutting future government spending.”
Mr. Feldstein proposes slowing the growth of benefits of middleclass retirees by gradually raising the full benefit retirement age for Social Security from 67 to 70 and also raising the age of Medicare eligibility to the same level.  This would create a budget savings of 1% of GDP, or $200 billion, by 2020.   Rather than eliminating such popular tax deductions as the one for mortgage interest or the exclusion of employer payments for health insurance, he recommends limiting the amount by which individuals can reduce their tax liabilities to 2% of adjusted gross income.  This single change to the tax code would, for example, reduce the 2013 deficit by $140 billion.
In addition to lowering tax rates for individuals, corporate tax rates should be cut from 35% to about 25% in order to be competitive with other industrial countries.  We should also adopt the internationally common “territorial” system which doesn’t tax foreign earnings brought back home.
In short, we decrease spending and raise revenue with entitlement reforms and a limit on tax expenditures thereby creating a framework for tax rate reductions and infrastructure spending.  These are the sorts of bold measures needed to produce a real stimulus and thereby get our economy back on track!

How To Do Intelligent Budget Cutting in Washington


The July/August 2013 issue of the Atlantic Magazine has an article “Can Government Play Moneyball?”, by two former budget officials, Peter Orszag (under President Obama) and John Bridgeland (under President Bush), which describes the very careless spending atmosphere in the federal government in recent years.  “Based on our rough calculations”, they write, “less than $1 out of every $100 of government spending is backed by even the most basic evidence that the money is being spent wisely.”  They describe in great detail their efforts to introduce mechanisms to evaluate the performance of social service programs of various types and how difficult this has been to accomplish.
“Since 1990, the federal government has put 11 large social programs, collectively costing taxpayers more than $10 billion a year, through randomized controlled trials, the gold standard of evaluation.  Ten out of the eleven – including Upward Bound and Job Corps – showed “weak or no positive effects on their participants.”  Here’s another example.  “The federal government’s long running after school program, 21st Century Community Learning Centers, has shown no effect on academic outcomes on elementary-school students – and significant increases in school suspensions and incidents requiring other forms of discipline.  The Bush administration tried to reduce funding for the program” but was overruled by Congress.  “Today the program still gets more than $1 billion a year in federal funds.”
Lots of people complain that the sequester is a “dumb” way to cut federal spending.  Of course, it would make far more sense to cut back spending in a rational way by evaluating all programs, keeping the effective ones and eliminating the ineffective ones.  As the sequester takes bigger and bigger across-the-board spending cuts each year for nine more years (it’s a program to cut $1 trillion over ten years), the big spenders in Congress are going to start crying “Uncle”! because their own favorite programs will be effected more and more deeply each year.  Maybe then, hopefully sooner than later, Congress will gain some collective common sense and accept the fact that there is a better way to make the significant budget cuts that are necessary.
Let’s hope so!