SalemNews.com, Salem, MA

April 17, 2013

Watson: Balancing taxes and cuts requires a grand bargain

Brian T. Watson
The Salem News

---- — This has been a very tough four years. We’ve endured the bursting of the housing bubble, the subsequent Wall Street meltdown, a dramatic reduction in consumer spending, severe contractions in industry and employment, and an ongoing foreclosure crisis. Our country is still struggling to right itself.

And, like a perfect storm, at the same time that large pieces of the private sector — housing, corporations, banks, and insurance and mortgage companies — were facing performance crises, the government was caught in an unhealthy, unsustainable financial condition.

Though the crisis in the private sector is not wholly unrelated to the crisis in the public sector — for example, was there too little regulation or too much? — nonetheless, either sector is free to perform honestly and superlatively despite shortcomings in the other.

But although private enterprise is slowly stabilizing, and although most private sector financial indices are moving in the right direction (at least partly in response to helpful government policy), government revenues and expenditures and future commitments are insufficiently coordinated and — taken as a simple math problem — pose an enormous challenge as we take the measure of what will be required, eventually, to bring revenues and expenses into rough balance. And longer-term, to slowly reduce the national debt of $17 trillion.

Those who believe in the American government as a mostly positive force (and I do) and believe in the unique tasks that it can achieve, and the unique, indispensable role it alone plays in our democracy — vouchsafing the values and aspirations of an egalitarian society — have the biggest reason to hope that Washington’s politicians can successfully fashion a rational, compassionate, fair, “grand bargain.”

It is a mammoth task. A “grand bargain,” which you’ve heard President Obama, Congress and any number of special commissions talk about, would be a 10-, 20- or even 30-year plan that provides support to those who need it, facilitates the things that the private sector does best, funds the obligations and agencies of the government, and makes sense economically; that is, it would create a sustainable financial course with respect to revenue, expenditures, program costs, inflation and myriad global realities.

And if all of that were not daunting enough, at the same time that the grand bargain must satisfy an accountant’s audit, it must also select wise policy paths. This is not just an option, or a bonus. It is unavoidable. For woven into every program, every budget line item, every government commitment, every subsidy (or not) to the private sector, every tax code provision, every piece of legislation, and every action by both the public and private sectors are assumptions, values and visions that inform the choices within those categories.

Furthermore, there are contradictory short-term and long-term needs. For example, long-term — meaning 15 to 30 years out — we need to have accomplished changes to Medicare and Social Security that will allow them to service the enormous baby-boom bulge that is now reaching old age. The demographics are formidable: Today, there are 45 million people receiving Social Security. In 2030, there will be 73 million. And today, there are 49 million Medicare users; in 2030, there will be 80 million.

And worse: In 1960, there were 5.1 workers per retiree. In 2030, there will be only 2.2 workers per retiree.

Short-term — meaning right now — the economy could benefit from additional, strategic government spending; more private investment; and more consumer spending and investment generally in initiatives that are needed, productive, sustainable, possess jobs and have a financial multiplier effect. Spending on infrastructure needs, green energy paths and global problem-solving are examples of this. These choices involve setting long-term policy goals and picking winners and losers, but government does that all of the time with every tax provision, subsidy and deduction allowed.

The good news is, there are many possible, smart ways to reduce government spending over the next 30 years. With careful reforms, we could preserve a safety net for the needy, maintain a capable military and preserve the government’s formidable capacities, and still get reasonably close to a balanced budget by, say, 2025. We’ll also be working down the size of the total national debt.

Another positive thing to remember is that roughly one-third of the annual federal deficit in 2012 was a result of the large unemployment we still have. The combination of laid-off workers paying reduced taxes, but using more safety net programs, hurts the government balance sheet. So getting people back to work will help us immensely.

There is a wealth of reforms and improvements that can be made in the public sector. People like Harvard professor Linda Bilmes and Paul Volcker, chairman of the Fed from 1979 to 1987, have offered many smart, doable ideas. Bilmes’ ideas extend to reforming the budgeting process itself.

Two things are absolutely clear though, and nobody will like them. One: Some spending cuts and program reductions are necessary, and some additional revenues (higher taxes) will be required. No solution is feasible without both of those parts.

Two: For a 25- or 30-year grand bargain to occur — one that works financially and programmatically — every member of Congress and the president will have to compromise — and compromise significantly — to reach an agreement on the deal that this country needs.

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Brian T. Watson is a Salem News columnist. Contact him at watson@nii.net.