How Can We Fix the Deficit?

Discussion of the Week
The House passed yesterday a stop-gap spending bill to keep the government operating through Mar 18. It would keep most agencies operating at their current funding levels but also enact about $4B in cuts as a down payment of sorts for the GOP package of $60B in spending cuts, which was approved by the House on Feb 19 but stalled in the Senate because that body was on its Presidents Day Recess. Senate Majority Leader Harry Reid (D-Nev.) will now attempt to get a bill across the floor and into conference in two weeks.

This is about just stop-gap spending for fiscal 2011. So far, however, nothing serious has been proposed for whittling the deficit down from its massive $1.3T to break-even. President Obama’s $3.7T budget for 2012 contains spending cuts and increases along with tax cuts and increases intended to trim $1.1T over a decade from projected deficits. Another decade without reaching break-even! Any suggestion for meaningful cost cutting is immediately dismissed as politically infeasible, so debt continues mounting for America. Just last month, the national debt increased by another $64B to $14.195T. One month earlier, it was $14.131T. In an attempt to delay hitting the national debt statutory limit this spring, the Treasury drained $158B from its cash reserves last month to support government operations, dropping its balance from $349B to $191B.

Everybody agrees that government spending and borrowing is not sustainable, but nobody can agree on a way to fix it. The biggest expenses for the government are Health and Human Services (Medicare and Medicaid), Social Security, and Defense. Neither party will tackle them.

We’ve seen this dance repeatedly over the past two decades and the result is always more spending and a growing national debt that left sensibility in the dust several administrations ago. The discretionary programs on the chopping block comprise just one third of total spending. Take away defense, as Washington always does, and what’s left adds up to just 15 percent of the budget — meaningless. Parties are discussing such line items as the $8B Obama wants for high-speed rail, against which Republicans are taking a hard stand. Who cares?

Changing administrations means nothing on this front. The top five items in the Bush and Obama budgets command the same share of spending.

Because nothing changes, it will probably take a catastrophe in the debt market to force a sudden, unattractive solution. Federal Reserve Chairman Ben Bernanke pointed that out in recent testimony before Congress. Last month, he said:

“One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”

We constantly hear that tough choices need to be made. What tough choices would you make? How would you solve the financial crisis in Washington? Click the comment link below to join the discussion!

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47 Comments

  1. Joe
    Posted March 3, 2011 at 1:44 am | Permalink

    I don’t want to make a long comment so I’ll say for starters let’s try “THE FAIR TAX”

    • Rick
      Posted March 3, 2011 at 1:26 pm | Permalink

      Yes, and what, pray tell, is Joe’s definition of Fair? If money is the measure of productivity (it isn’t, but let’s pretend), shouldn’t those who have provided the most productivity enjoy their fruits even more than schlubs like me, and thus be taxed even less?

      And if you don’t happen to subscribe to money=productivity, what then is fair? Since tall people are statistically more likely to be higher earners, shall we tax according to height? Tax men more than women?

      Come, Joe. Enlighten us with what is truly “Fair”…

      • Posted March 3, 2011 at 3:02 pm | Permalink

        I think he means the Fairtax referenced above and explained at Fairtax.org.

        • Rick
          Posted March 3, 2011 at 3:20 pm | Permalink

          Jason, now you done and pointed at the bait! I has to go and cover it up with leaves and go hide behind my tree again!

  2. Charlie
    Posted March 3, 2011 at 1:50 am | Permalink

    Fix Medicare:
    The first task would be to determine who is truly needy (my parents sold their ranch in Colorado several years ago. They have nearly $1M in the bank, but still qualify for Medicare. Ridiculous). Second, the solution has to be high deductable insurance coupled with health savings accounts (for everyone, not just the needy). The HSA would be funded with tax-free dollars, could only be spent on bona fide medical costs (no liposuction or medical marijuana) and it could be passed down to our heirs. The consumer would be responsible for the first $10k or so/year of their health care costs. This would bring competition into the marketplace and drive costs lower. Because HD insurance premiums would be lower than the “pay for everything” plans we currently have, more people would be able to afford them. Neither the HSA nor insurance plan would be tied to employment so they would be transportable. Employers could certainly entice employees by contributing to HSA and insurance costs, but the policy would be in the persons name only. For those who cannot afford either, they will still have to be subsidized by the gov’t. For what we currently spend on Medicare, we can make a large annual contribution to every low income persons HSA. Just like everyone else’s HSA, unspent amounts would roll over year after year and accumulate into enough to easily pay for any non-catastrophic health costs. It would be the person’s money, not the gov’t, so they would be good stewards of it. And just like everyone else’s HSA, any unused portion could be willed to their heirs, setting the next generation up for success. The HD insurance could be pooled and bid out to insurance companies every 4-5 years paid for at a fraction of what Medicare currently costs.

    If 17% of the 300,000,000 US population live below the poverty level, that would be 51,000,000 people. Medicare currently spends $484B/year. That comes out to $9490/person/year. If we gave each of the 51 million $5k/year into their HSA, I’m confident we could pay the HD insurance premium with the other $4490. Even if we assume only $300B (as some of that $484B has to be paid for currently ongoing catastrophic care) that still gives us $5882/person/year. If we gave them $3k/year into the HSA, that would add up quickly.

    Eventually, as people’s HSA’s grew, they could move to higher and higher deductable, lowering premium costs. Eventually, the majority of us would be able to self-insure, and health insurance would no longer be an issue.

  3. CHRIS - DENVER CO
    Posted March 3, 2011 at 2:03 am | Permalink

    I also want to add that I give an “F” to any federal or state budget that ends in a deficit. Lowering the deficit, or rate we go into debt, doesn’t cut it for me as the US still adding debt to the national debt.

    I will only be happy with a budget surplus and I’d like to see the US pay down it’s national debt to $0.

    So I only give out two grades, an A if we run a budget surplus and pay down the national debt, or an F for FAIL no matter how large, small, or how much we cut the deficit.

  4. Chris Burns
    Posted March 3, 2011 at 2:11 am | Permalink

    As for means-testing medicare and SS, this will not go far in terms of solving the budget issue. If you deny these benefits to, say, the highest 5% earners in the country, then you’re only saving 5% of the program’s cost, because they do not draw a disproportionate share of the benefits.

    But, the wealthiest 5% *do* draw a disproportionate share of income – around 30-35%. So if we want to balance the budget, one obvious way is to increase government revenue by increasing taxes on those who have the lion’s share of the country’s income. This is a very straightforward solution to the budget problem, but the discussion in Washington and among financial types in New York is entirely focused on cutting government spending – even though government spending is not out of line with historical trends, and is generally lower as a percent of GDP than almost any other comparably developed/advanced nation in the world.

    I know I’m going to hear an earful from the libertarian-minded out there who oppose progressive income taxation *on principle*, so in advance of that i’ll just say this: There’s no way in hell I’m going to believe that people who out-earn me 10-1 are out-producing me 10-1. There’s no way in hell you’re going to get me to believe, for example, that the VP above me in my company is 20x more productive than the patrol officer who responded to my 911 call last week, yet he earns takes home 20x more money. The market usually rewards competence, punishes incompetence, but it also generally gets the numbers askew.

    The budget deficit will be large, and will be with us, until income taxes are raised to at least 1990s levels, and stay that way for a decade or more.

    • Rick
      Posted March 3, 2011 at 2:29 pm | Permalink

      truth to power.

  5. Posted March 3, 2011 at 3:31 am | Permalink

    I agree with what everything being said about Social Security. Make money management classes mandatory in school and teach the younger generation how to save. Whatever you sow you will reap later. People are just taught to be waaay too dependent on the government to give them everything. People with this kind of attitude will never learn to take control of their own destiny. This reminds me of a commercial I saw 3 days ago for a credit relief company: people were giving testimonials of how great they were and how they lowered their debt. One lady said ” I just feel like the credit card companies are taking advantage of people and trying to keep them in debt” This made me want to scream: HELLO – The only debt you have with the credit card companies is from stuff you decided to buy on credit and then didn’t pay back!

    As far as the defense budget goes – we definitely need to invest in protecting this country. Commanders of our armed forces should be mandated to lower their own budgets by a certain percent say 5% in a year. They will then figure out ways to save on little things here and there in their own field of expertise. After all, the budget needed always expands to fill the amount funding available. If you are given $1B in a certain field you will figure out a way to use it. If you are given $900M then you will find a way to make that work instead of $1B etc.

  6. Posted March 3, 2011 at 6:02 am | Permalink

    You can not run a business or a government without money. It is clear that cuts are not going to get us there. Soooo, taxes have to be raised. Perhaps not to the Eisenhower era level of 93%, but for the richest among us up around 65% could do the job. Polls show the American public is ready for it. So which brave soul will be the first to suggest it?

    • Rick
      Posted March 3, 2011 at 2:36 pm | Permalink

      Earl, your heart’s in the right place, but you don’t seem to have much of a head for recent much less distant history. We just came (part way) through the worst financial disaster since the great depression, the government’s running a risk of shut down for lack of a congressional spine, but NO ONE is talking about raising taxes. Even letting the Bush tax cuts expire (which is how they were initially passed… they had a sunset provision built in) was recast as a tax increase and thus, they live on (mostly). If that much pain wasn’t enough to let “tax the wealthy” be uttered by a representative, I hate to think what amount of pain will be required (or will be coming down the pipe when we simply refuse to pay the piper…).

  7. Cory R
    Posted March 3, 2011 at 7:29 am | Permalink

    Cuts alone will not solve the problem. Fixing tax loopholes (how many large companies pay effectively 0% tax?), decreasing the tax burden for the bottom 99%, and increasing it for the super wealthy is a start.

    Also, take a crack at the budget yourself with this interactive feature from the NY Times:

    “How Readers Chose to Fix the Deficit”
    http://www.nytimes.com/2010/11/21/weekinreview/21leonhardt.html?_r=1

    Lots of great ideas to comb through.

    • Charlie
      Posted March 5, 2011 at 12:37 am | Permalink

      All companies pay 0% tax eventually. All they do is raise the price of thier product to pay the tax. Eventually the bill always falls to you & I.

      • Posted March 5, 2011 at 10:09 am | Permalink

        That’s right. Ditto producer price inflation, labor programs, and so on. Every business needs to charge more for a good or service than it costs to provide that good or service, and taxes are included in the cost of goods sold.

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