For Future Deficit Reduction, Policy Choices More Important Than Amount

In his press conference this week, President Obama suggested that policymakers only need to pass another $1.5 trillion worth of deficit reduction, on top of the $2.5 trillion already enacted, to stabilize the growth of the nation’s debt and, in his words, “finish the job.”

The Center on Budget and Policy Priorities and The Committee for a Responsible Federal Budget, two well-respected fiscal policy organizations, basically agree with the President’s math, and there is nothing to quibble about in those calculations regarding stabilizing the debt.

However, that level of deficit reduction would hardly mean the “job is finished.” In fact, the whole idea that we can pinpoint a specific amount of deficit reduction necessary within a 10-year time frame can be a distraction from the fiscal sustainability conversation we need to have.

Getting caught up in exactly when the debt-GDP-ratio stabilizes, or whether we might miss that goal by a few percentage points at the end of the 10-year window, assumes a precision in economic and technical estimating that no entity actually possesses (even the CBO, whose respect and skill in these matters is second-to-none).

Our main emphasis should be putting more focus on ensuring long-term stabilization of the growth rate of the debt rather than the specific level at which it stabilizes. Ensuring that the level is generally stable over a broad period of time and is not projected to dramatically grow at a later point should be the top priority.

Since all available evidence points to our projected spending on Medicare and Social Security growing more quickly than the economy in the future -- pushing our debt to grow more quickly than the economy in the future -- we are a long way from achieving that type of stabilization.

Additionally, because about 70 percent of the deficit reduction already enacted has come from the discretionary part of the budget, further action to control the long-term increase in debt will have to center around tax reform and changes in mandatory spending programs.

It is unrealistic to expect that we can cut domestic discretionary spending much further, both because of political realities and the potential damage to the economy in the short term and to the country’s capacity to make investments necessary for long-term economic productivity. If the spending caps already in place hold firm, domestic discretionary spending will shrink to it’s lowest level as a share of the economy in over 50 years.

There may be more room for savings from defense spending as operations in Afghanistan wind down, but not of sufficient magnitude to alone offset the projected growth of mandatory programs.

Unlike achieving savings from discretionary spending (where decisions are made annually), saving money in the largest mandatory spending programs needs to involve enacting actual policy choices as opposed to imposing simple caps. Furthermore, the changes will likely have to be phased in over a long period of time and thus, will not appear in the Congressional Budget Office’s 10-year scoring window.

Any attempt to make those changes look more dramatic within the 10-year window are likely to increase the use of gimmicks and/or decrease the chance to achieve maximum policy efficiency.

That is why it is more important that policymakers focus on changes they can make for the long term than on achieving a precise amount of deficit reduction in the short term. In fact, one could easily envision a deficit reduction package that falls short of debt stabilization within the budget window but is still more fiscally responsible than a package that would lower the debt-to-GDP ratio within the window.

That could be because the first plan, for example, slowly phases in increases in entitlement program retirement ages, or perhaps paves the way for Medicare to shift away from fee-for-service medicine. Such changes would represent long-term victories against the growth of debt, but without much short-term deficit reduction.

So when evaluating the upcoming budget debates over the debt ceiling and the sequester, fiscal hawks should accept legislation that approaches the debt-stabilization target regardless of the exact scoring -- as long as it contains policy reforms that will reduce deficits in the long term.

The topic of federal spending/deficit rates and debt accumulation is too often discussed by political economists and not often enough by mathematicians, business owners, and investors i.e., risk takers.

Too often I read of the need for a “balanced” approach and “bipartisan cooperation” to decide on federal budgets. Such concepts are unrelated to the math that reveals the physical laws governing what is a sustainable budget. Having balance or compromise is of no interest to the numbers. If you spend or tax too much, you burden the nation. Increasing taxes some and decreasing spending a little is a political solution that does not take into account the math—the math is in final arbiter.

Taking more money from the economy to plug into federal tax coffers ensures that a percent of the take goes to debt servicing, some of which is outside the US. Furthermore, private dollars both motivate the individual to be productive and are quickly spent or invested where the individual decides the need and risk/reward tradeoff are most beneficial—gov’t cannot achieve this degree of efficient and effective allocation of resources.

The gov’t v the individual argument can be analyzed many ways but in economic terms, it decidedly favors keeping the money in the hands of the earning individual.

You are right, of course. However, if it is simple as pure mathematics, we wouldn't be in this mess in the first place.

Whenever politicians and economists talking about policy changes, they usually trot out dying grandma's and sick children to tug general public’s heartstring. It has been tried and true. Every time.

And every time, the public decides the government can do a ‘better job’ than “ favors keeping the money in the hands of the earning individual”.

Thanks for the reply. I suppose, eventually, the math catches up to the politicians, as it did in 1979 with lofty interest rates and the associated economic realities.
I read with interest your comment about the “public decides the government can do a ‘better job’” However, I just realized that when I have asked people about this, they have never thought of the connection between having the govt deal with the poor, suffering soul and their own tax payments. And in practice, there really isn’t much connection in their experience. If something appears like a tear-jerking need, they immediately think the govt should fill it. It is an unconscious reaction on their part.

Perhaps the math doesn’t matter. Maybe the govt can spend to infinity. However, if that is true, then why would there be a need for a tax increase? Why not simply erase all taxes for everyone? If there is no relationship between spending and creating a debt problem, then why not simply spend more? No one seems to see any consequences so why worry? Be happy and let the spending flourish. In the meantime, I can shift my attention to the issues of individual freedom and human rights. More realistically, we need a quantitative relationship between govt spending, taxes,and economic growth.

Good reading your thoughtful post.

It may be a generational thing, but I always suspect the ‘public education’ of more than 5 decades.

Priority for a functioning graduate is all upside down. The Young always assume that ‘stuff’ will be there.

Until math catches up with reality, that is........

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