How does Jacob Lew cut the deficit?

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Friday, July 16, 2010

The Post asked Maya Macguineas, Franklin D. Raines and Douglas Holtz-Eakin what's first for President Obama's nominee to direct the Office of Management and Budget.


President of the Committee for a Responsible Federal Budget

Jack Lew is going to have one of the hardest jobs in Washington: selling tough policy measures to members of Congress who aren't exactly buying.

But 2011 is the year policymakers are going to have to put in place a serious plan to reduce the deficit, phasing changes in gradually so as not to destabilize the recovery. Otherwise, we risk credit markets turning against the United States, leading to our own sovereign debt crisis.

The White House must offer a credible budget next February, unlike this year's totally unworkable proposal to add $10 trillion to the debt over this decade. The president can't expect Congress to lead on crafting the specifics. Instead, the White House will have to offer a detailed proposal (think defense cuts, Social Security reform, a strict health-care budget and the reduction of a slew of tax breaks), cooperate with both parties to hash out a workable plan and find ways to offer political cover for those willing to step up.

Lew is going to have to spend much of his time building relationships and coalitions on Capitol Hill. He'll have to convince Democrats that the bulk of changes will have to come out of spending (where the problem lies); persuade the White House to break its untenable promise not to raise taxes on families making less than $250,000; and convince Republicans that taxes will have to be part of the ultimate bargain. The policy piece of Lew's new charge is tough; the politics will be even tougher.


Director of the Office of Management and Budget, 1996-98

Jack Lew and I worked together on the deficit reduction deal in 1997 between Newt Gingrich and Bill Clinton that balanced the budget. Unfortunately, the problem is much bigger now and the politics are much worse.

Entitlement reform has to be part of any effort to bridge the structural gap between federal revenue and outlays. But the biggest entitlement budget-buster, and one that few people are talking about, is the net interest paid on federal debt. Interest is projected to grow from 5 percent of outlays this year to 13 percent in five years. Looked at another way, interest on the federal debt will grow from 1.3 percent of gross domestic product in 2010 to almost 15 percent in 2050. Total federal revenue is estimated to only be 14.8 percent of GDP this year. Most of the long-run deficit is composed of the interest on debt piled up because we were unwilling to pay today (or over an economic cycle) for the spending we want today.

This means, unfortunately, that cutting the budget deficit in half is not enough. To reduce the impact of interest entitlement spending on everything from taxes to defense to health care, we need to balance the budget as soon as this recession is over. Otherwise, in the not-too-distant future we will face a choice between paying the bondholders and paying the soldiers, doctors, teachers and retirees.


Director of the Congressional Budget Office from February 2003 through December 2005

Jack Lew's priority must be to demonstrate the Obama administration's commitment to controlling spending. The administration's track record on debt is horrendous. It publishes budgets that show the president's preferred policies lead to a dangerous debt spiral. Obama officials pledge fealty to fiscal discipline while they push through pay-as-you-go budgeting rules with Swiss-cheese-like holes and ignore spending caps. These inconsistencies have lent a craven, political feel to actions such as the establishment of the fiscal responsibility commission.

What is the real plan? It needs to center on stabilizing the debt (relative to the size of the economy), and soon, by curbing administration spending. It is well known that the big money is in entitlements. But OMB is at its best regarding discretionary spending. That is easier to cut more quickly, and there is plenty of bloat in the annual $1.4 trillion discretionary budget. Lew should start by dumping the gimmicky, Bush-like freeze on non-defense, non-security spending and imposing a top-line overall freeze.

Making those freezes stick will require overhauling congressional relations. Liberals will be outraged, appropriators will threaten revolt and Republicans will be suspicious. But a solid core of centrists and conservatives in both parties will recognize the virtues and give Lew something to build on. Demonstrated spending control would send the right signal to international financial markets and the U.S. private sector.

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