Urban Institute Fellow C. Eugene Steuerle answers five questions about the nation's out-of-control deficits and the hard choices policymakers must make to put America back on a sound fiscal path.
April 1, 2010
1. Five Questions last tackled deficit and budget issues about a year and a half ago. What has changed since then?
Most significant is the merging of short-term, intermediate, and long-term fiscal issues. We predicted that health care costs would keep rising, that our tax system needed fixing, and that retiring baby boomers would reduce the number of taxpayers and increase the number of government beneficiaries. But we didn't predict that we'd be hit by a deep recession. So now the question of how to cut back from recession-level high spending and low taxes runs headlong into questions about how to control costs in health care and retirement spending and what we're going to do more generally about tax reform. These issues are all nested now—you can't try to tackle the short-term issues without also taking on the long-term ones anymore.
2. The president recently created a commission to propose ways to balance the budget and improve our long-term fiscal future. What challenges does the commission face, and what do its members need to do to succeed?
"Every dollar of revenue [in 2009] was committed to programs that were already on the books or to interest payments on debt."
The commission's task is difficult. Our elected officials are on the horns of a dilemma. For at least 13 years, neither political party has asked the middle class to pay for essentially anything, whether through higher taxes or federal spending cuts.
But our budget—particularly our long-term budget—is now so far out of balance it's impossible to avoid asking the middle class for at least one or the other—and probably some of both. So far, neither party has tried, because doing either creates a political vulnerability. If one party even slightly sticks its neck out, the other one chops it off.
The hope is that a commission will better equip lawmakers to deal with this issue by creating some bipartisan consensus. Commissioners need to convince the public and political leaders that something should be done. The real question is whether the commission members are willing to compromise to get it done.
3. Will the renewed public attention to budget deficits and the national debt help Congress get federal finances under control?
The public is certainly more aware of the national debt than in the past, and Americans have begun to rank it higher and higher as a priority. The recession brought new urgency to act, but more than voters' angst and greater media coverage are needed. It's going to take the president and strong congressional leadership to convince the American people that they, the public, benefit in the long-run from fiscal responsibility, even if it means higher taxes or curtailed spending now.
4. What's your advice to policymakers ready to reform fiscal policy?
My main recommendation for the commission and elected officials is to tune up or revamp the budget process. "Process" sounds dull, but discussing the budget openly and honestly with the public, having the president submit it in a way that admits that deficits are taxes on future taxpayers, taking responsibility for changes passively accepted because they are built into the law, and spelling out Congress's budgeting responsibilities to avoid unsustainable programs and budgets can help get around political stalemates.
In the past—and this wasn't even a formal process, but a norm on Capitol Hill—the government at least tried to balance the budget. Maybe not each year, but they aimed for balance over the economic cycle and in the long term. This process constrained congressional action enough that large deficits and unfunded commitments into the future tended to be limited. I'm not arguing here for a balanced budget each year, merely showing the power of adherence to a process.
And though few may remember it now, when the Republicans and Democrats had their 1996 war over the budget—which led to a temporary government shutdown—that fight was partly over what counted in balancing the budget. They disagreed about whose numbers to use and what to count, but both sides were constrained overall.
I think some similar things have to happen now. For example, let's look at how the budget gets reported. We can't let deficits be hidden as if they aren't a tax on anybody. They are a tax on our children. They are just as much a tax as the monies that IRS collects today. That's why reporting things like that more openly and honestly is so important and urgent.
5. If the federal budget were balanced and the deficit shrinking fast enough, would that be enough to say the United States has sound fiscal policy?
I'd still be concerned about the share of the federal budget—both revenues and spending—that's on auto-pilot. A lot of spending and tax subsidies are tied to programs that previous Congresses enacted. Most important, some go up automatically when people spend more on health care or housing or just live longer and get more years of benefits. Something I developed called the "fiscal democracy index" basically shows the revenues left over after you pay for all those "automatic" programs—including the rising interest on the debt. Increasingly, discretionary spending that had to be appropriated each year has either fought for leftovers or been financed out of the deficit. For the first time in our history, the fiscal democracy index—the amount of revenues left over after subtracting automatic spending—dropped below zero in 2009. That is, every dollar of revenue that year was committed to programs that were already on the books or to interest payments on debt.
My index shows that there is almost no "give" in the budget and, without it, you can't solve the fiscal problem even if you solve the deficit problem. You would still have no money for emergencies, no money for new needs in society, no money for new opportunities, and no money for new voters to use for what they want—which can differ greatly from what past generations of voters have put into the law.
Subsequent Congresses could alter these automatic programs, but the political hazards are high. To do anything new, a politician has to tell the public that he or she simultaneously is going to renege on some promise made in the past. Formerly, economic growth provided uncommitted revenues that the politician could put toward new spending or tax cuts. Those days are gone. Long term, the only real option is to create enough give in the budget that future voters can decide what they want—instead of letting either party today make too many extraordinary commitments too far into a future they cannot possibly know.
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