Ignorance and Hypocrisy Cripple Long-term Deficit Reduction

Ignorance and Hypocrisy Cripple Long-term Deficit Reduction

Printer-friendly version
a a
Type Size: Small

Current economic and fiscal debates are plagued by the twin evils of ignorance and hypocrisy, as witnessed by ongoing legislative battles. Both hinder efforts to strengthen the economy and focus attention on the real fiscal challenge at hand.

In a sense, ignorance is understandable – though surely not admirable. Our economic and fiscal challenges are moving in opposite directions, with solutions and timeframes for action that seem contradictory.

On the economic front, policymakers must ensure that they take steps to strengthen the recovery – or, at the very least, avoid others that would raise risks of a double-dip recession. That means potentially more stimulus legislation – and certainly no fiscal contraction until the economy grows considerably stronger.

On the fiscal front, the problem is not the eye-popping deficits of this year or next, which are largely fueled by a weak economy and the extraordinary measures of the Bush and Obama  administrations and Congress to stimulate the economy and stabilize the financial system. The problem is the long-term deficit picture, which will require fiscal constraint of the kind Washington has never before undertaken.

Debate over the pending jobs bill illustrates the confusion on both economic and fiscal fronts.  In the House, Democratic moderates forced House leaders to pare it back, saying the deficit was large enough, thank you.  That voters are expressing increasing concern over the soaring red ink was surely not lost on the moderates.

But, in ensuring the bill adds only $54 billion to the deficit over the next decade (as opposed to $134 billion in its earlier version), House leaders dropped the additional state fiscal relief that it previously included.  That means the legislation, which is supposed to strengthen the economy, now lacks an important measure to prevent states – which face balanced-budget requirements – from having to cut programs or raise taxes even more, both of which would reduce demand in the economy and raise the chance of a double-dip recession.

Yes, if the bill is enacted, the short-term deficit will be lower than it would have been under its prior version. But short-term deficits are not the fiscal problem. In fact, these deficits have provided an economic cushion for a weak economy. And, while it’s now fashionable to trash the original stimulus bill – the American Recovery and Reinvestment Act – that President Obama and Congress enacted in early 2009 as a cesspool of wasteful spending, the Congressional Budget Office recently estimated the measure saved or created as many as 2.8 million jobs and raised Gross Domestic Product (GDP) by as much as 4.2 percent.

The problem is what happens after the economy has fully recovered. With health care costs continuing to rise faster than inflation (thus driving up the costs of Medicare), and with more Americans becoming eligible for Medicare and Social Security, budget experts expect the deficit to reach unprecedented levels in the coming decades both in raw dollar terms and as a share of GDP.

As we have said, the economy is too weak at the moment for serious deficit cutting. But nothing is stopping lawmakers from crafting a deficit-reduction plan, today, that it could put in place at a later date. That would reassure financial markets, reducing the risk of a short-term crisis of confidence in U.S. fiscal stewardship that could send the dollar plunging and inflation and interest rates soaring.

But, Congress is focused far more on short-term deficits than the long-term ones. In fact, for all their high-minded rhetoric about fiscal responsibility, lawmakers could easily be tempted to make the long-term problem worse in the coming months. That’s because they will probably address the vexing issue of how to permanently fix the federal estate tax which – due to peculiarities in the 2001 legislation that reduced it sharply – actually expired this year but will return to its pre-2001 levels next year.

President Obama has proposed to make the 2009 estate tax level permanent, but supporters lack the 60 votes in the Senate to make that happen. That’s because other senators (and House members as well) want to reduce the tax, which now hits only the top one quarter of one percent of estates, even more.

That Congress has not killed this idea gives you a good sense of where long-term budget deficits, however much they represent a serious threat to the nation’s economic future, rank in the eyes of all-too-many lawmakers.

Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.

Post your comment below or click here for the previous Capital Exchange post.

Lawrence Haas
is former senior White House official and award-winning journalist, writes widely on foreign and domestic affairs. His articles have appeared in The New York Times, USA Today, Los Angeles Times, Baltimore Sun, Miami Herald, San Diego Union-Tribune