Choose your own deficit

By Ezra Klein
Washington Post Staff Writer
Sunday, June 27, 2010; G01

When I was a kid, I loved the "Choose Your Own Adventure" books. They involved you in the story, letting you make choices that affected the outcome and, occasionally, revealed more than you might like to admit about how you'd act in tough situations.

It's been years since I thought of those books, and the reminder came from an odd place: the nonpartisan Committee for a Responsible Federal Budget. It's sexed up a Web site filled with white papers and charts with a game called "Stabilize the Debt," which allows you to make the sort of difficult choices necessary to bring the federal budget into balance, bringing some discipline and realism to a question too often marred by vague, high-polling platitudes.

If we're going to talk about debt and deficits -- and it seems that we are -- we may as well do it right. First, there's the difference between accumulated debt (how much our country owes) and deficits (how much we're spending compared with how much we're getting in tax revenue). People often use the terms interchangeably. They shouldn't.

Then, we need to be clear about the timetable we're talking about:

-- Short-term deficits driven by the Great Recession, which many economists think should actually go up in order to kick-start the economy;

-- Medium-term deficits over the next decade or so, which many economists think need to go down if we're to avoid higher interest rates and to reassure the markets;

-- Long-term deficits, which are driven by health-care costs and which most everyone agrees need to go down if the country is to avoid bankruptcy.

Finally, we need to be clear about what we're willing to do about the debt. If people are talking about managing deficits and not saying what spending they'll cut and which taxes they'll raise, they're not saying anything useful. To help us get specific, I asked Maya MacGuineas, who leads the Committee for a Responsible Federal Budget, to price out some of the policy options. We focused on the time period between 2012 (when new policies would go into effect) and 2022. The spreadsheet she sent was vast and intimidating, but here are some of its lessons.

All big numbers are not equal. We have a tendency to let millions, billions and trillions run together. All are unimaginably large numbers. But some are a lot larger than others. The mathematician John Allen Paulos likes to put them in terms of time: A million seconds is less than 12 days, a billion seconds is almost 32 years, and a trillion seconds is (wait for it) 32,000 years.

Be clear on the goal. Let's assume the Bush tax cuts expire for people making more than $250,000 and discretionary spending grows very slowly in the coming years. By 2022, that scenario puts debt at about $21.5 trillion. MacGuineas thinks the debt-to-GDP ratio should be no more than 60 percent: That means debt will need to come down to about $14.6 trillion, and we've got $6.9 trillion to cut between 2012 and 2022 to get us there.

All is lost if the economy doesn't recover. Deficits are in large part a function of economic conditions. High unemployment means that fewer people have jobs, which means less tax revenue, and more people need social services, which means more government spending. If we don't get the economy moving again and remain trapped in the high-spending, low-revenue cycle, we'll never get deficits under control. So anything that accelerates short-term economic growth and keeps us from locking into a new norm of high unemployment -- stimulus spending, for instance -- is worth doing. And yes, we can afford it: $100 billion in additional stimulus is slightly more than one-half of one percent of our anticipated debt.

Don't be fooled by false deficit prophets: Many policies that sound impressive when a politician promotes them don't actually save much money. Cutting foreign aid in half, for instance, will save $210 billion by 2022. That would get us 3 percent of the way there. Cutting earmarks in half is even less effective: It would save $130 billion by 2022.

The Bush tax cuts are really expensive. The tax cuts expire this year. If lawmakers renew all of them, they'd add $6 trillion to the deficit from 2012 to 2022. If lawmakers let the cuts for the rich expire but maintain the breaks for the middle and working class -- which is what they're likely to do -- they've still stacked up $4.9 trillion in debt. If they drop everything except the patch protecting the middle class from the Alternative Minimum Tax , they've only added $1 trillion -- and cut $3.9 trillion from our expected debt. Much of the medium-term problem would vanish right there.

Speaking of taxes, this will be hard without raising them: It's difficult to find that much money, that fast, on the spending side. People talk about raising the eligibility age for Medicare and Social Security, but upping them to 67 and 68 respectively would only save $560 billion. That's not nothing, but it's only 8.1 percent of the way to our goal.

Entitlement reform will require patience: In the medium-term, there's just not that much you can do on entitlements. Any major changes will have to be phased in slowly, as you can't tell people retiring in five years that the health benefits or pensions that they paid for and we promised them won't be there. Moreover, the entitlement crisis is driven by Medicare and Medicaid, not Social Security, and the Medicare and Medicaid crisis is driven by health-care costs in general. Over the long-term, our fiscal future basically comes down to a simple question: Can we get health-care reform right?

Watch mandatory spending, not discretionary spending: Most of the money is tied up in spending -- and tax breaks -- that grow automatically, not the discretionary spending that Congress has to approve every year. We're talking here about the entitlement programs, but we're also talking, to a degree that people don't realize, about tax expenditures. You could save $480 billion by limiting itemized tax deductions for wealthy filers, $820 billion by replacing the tax protection for employer-based health care with a flat credit, and $940 billion by curtailing the state and local tax deduction.

There's no such thing as "non-defense discretionary spending." That's a term politicians use when they want to talk about cutting non-entitlement spending but they don't want anyone to think they'd dare take a single tank away from the Pentagon. But a world of deficit reduction is a world of hard choices: defense or education; defense or higher taxes. A panel led by Rep. Barney Frank (D-Mass.) recently came up $1 trillion in proposed reductions over the next decade. They need to be on the table.

Look for two-fers: There's a lot we could do to improve the budget picture that would also fulfill other goals. A carbon tax would reduce carbon emissions and raise $700 billion. Reducing farm subsidies would save $160 billion and also get rid of a horribly wasteful program. Ending the tax preference for employer-based health care would save $820 billion and lead to a more efficient and less costly system.

Do this yourself: "Debt" isn't a buzzword, it's a math problem. And it's instructive to try to solve it. The 'Stabilize the Debt' game allows you to cut, tax and spend your way to a better budget outlook. So go ahead. Choose your own deficit.

© 2010 The Washington Post Company