What not to do about the federal deficit


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The co-chairmen of the president's National Commission on Fiscal Responsibility and Reform (the "deficit commission") have sparked a heated debate about how best to address the federal deficit.

While some of their proposals deserve serious consideration, their overall strategy is skewed heavily toward spending cuts rather than restoration of revenues.

The immediate priority for Congress should actually be to increase the deficit — by providing badly needed additional stimulus funding to make up for the woefully inadequate Recovery Act of 2009.

In our demand-driven economy, the federal government is in the best position to restore demand lost to the financial crisis and recession.

Thus, the debate raging about the deficit is quite untimely — it reinforces the misguided notion that bigger deficits right now are bad for the economy. Our leaders should focus on how to avoid massive service cuts and layoffs of state and local public employees (the largest employment sector in the U.S. economy). In short, economic stability should come first if we are concerned about deficits. A stalled recovery will make it harder to generate the tax revenue needed to avoid larger deficits down the road.

Stimulus spending is already coming to an end, and the wars will follow at some point. In the long run, the biggest contributors to the deficit will be rising health-care costs and the likely continuation of the Bush tax cuts. One would think from the commission recommendations, however, that the biggest culprits are entitlement benefits — such as Medicaid, Medicare, and Social Security — and discretionary domestic spending.

While Medicaid and Medicare are major contributors to the deficit, the underlying cause is rising health-care costs. To really fulfill its promise to put everything on the table, the commission would have proposed a public option in health care, which could do much to keep costs down.

Social Security simply does not contribute to the size of the federal deficit; the Social Security system is legally prevented from deficit spending. Neither is discretionary spending a significant cause of deficits. Yet the commission calls for benefit cuts in all three areas — health insurance, Social Security, and discretionary programs.

Recommendations more worthy of debate include cuts to defense spending and caps on agricultural subsidies. The commission should be lauded for posing an option that would end all special tax breaks in the income-tax code — except for those credits targeted at lower-income households — and lower the cap on the home mortgage interest deduction. But its price for these progressive changes would be rate cuts that would make the income tax less progressive.

Notably absent: a proposal to let the Bush tax cuts on income more than $250,000 expire, which would reduce the deficit and the debt by $1 trillion over the next 10 years. Since 1980, the average income of the bottom 90 percent of the population has stagnated, while the richest 1 percent saw their real incomes grow more than 250 percent. Surely the folks at the top don't need more tax cuts.

Better: adding a new tax bracket on incomes more than $1 million, which would put an end to the red-herring debate about "small businesses" being hurt. Instead, the commission leaders would eliminate the existing top bracket.

The country would have been better served by a recovery commission, for now. Instead, the deficit commission has focused attention on the wrong short-run problem (deficits instead of a stumbling economic recovery) and on imbalanced long-term solutions that focus too much on spending.

We are left with a debate that has emboldened anti-government ideologues' misguided view that the deficit is exclusively about over-spending, while missing the importance and value of the work of public-sector workers, and the need to protect Americans' retirement security from poorly targeted cuts to Social Security.

Peter Fisher is a University of Iowa professor emeritus of urban and regional planning and the research director of the Iowa Policy Project.

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