Outlook: Five myths about cutting the deficit

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William G. Gale
Monday, November 29, 2010; 11:00 AM

William G. Gale, a senior fellow at the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center, discusses his Outlook article titled 'Five myths about cutting the deficit.'

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William G. Gale: Please feel free to submit questions

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Rocci Fisch: Five myths about cutting the deficit

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Social Security: From the 1950 Brookings monograph 'The Cost and Financing of Social Security,'by Lewis Meriam and Karl Schlotterbeck: "The [Social Security] Trust Fund is a fiction, serving only to confuse." That quote is NOT taken out of context. William G. Gale of the Brookings Institution on 11/28/2010: "Supporters of Social Security argue that the program's 2010 surplus, combined with its projected 27-year solvency, should exempt it from the budget axe. " Mr. Gale offered no comment on the supporters' claim about Social Security's solvency, so I assume that he agrees with it. So Mr. Gale should please explain why he and those supporters aren't confused about the "Trust Fund."

William G. Gale:

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April 2011: The government's authorization to overspend will end in April 2011. Do you think that Congress will resolve this by increasing the debt ceiling? If that is done, will the value of the dollar deflate? Will April be a pivotal moment as far as our economic future is concerned?

William G. Gale: Shutting down the government, of course, is also a pretty ugly solution and it backfired on those who fomented it in the 1990s.

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Saudis: what is the value of the U.S. Treasury bonds that they own? One thing that confirmed my suspicions from the WikiLeaks cables is that they expect us to fight their wars for them. Can we tell them that we choose to not pay back some of our monetary debt to them because of the debt they owe us for keeping them free from the Iranians, Russians, et al?

William G. Gale: (likewise, going after waste, fraud, abuse, earmarks, salaries of government workers, etc. are not going to solve the fiscal problem.)

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Urgency of the problem and the need for a restructuring of government.: My questions come in the form of two comments: 1. You state that the United States does not confront an imminent fiscal crisis because it will not materialize until around 2020. But given the size of both the U.S economy and bureaucracy compounded by the projected huge near term deficits of $1 trillion per year, isn't the crisis really upon us now and isn't it urgent we act immediately to avert the crisis? Put simply the U.S. economy is like a huge oil tanker that takes a long time to turn around. 2. Are budget adjustments, taxes and program restructuring, sufficient to avert the crisis? Truthfully, the U.S. administration is a nineteenth century structure overlayed with a mid-twentieth century bureaucratic remodeling and then of course a huge number of additional rooms to support an expanding family. Doesn't this crisis require a reformation of goverment, especially at the federal level within the federalism framework to be effective? Simply put, in our last crisis we grew out of the problem benefiting from lower taxes and a restructuring of our industry and finance system, this time we need to restructure and modernize government itself to grow out of the problem.

William G. Gale: Very briefly, yes we should make an effort to make these changes now -- not to cut spending and raise taxes now because we are in a very weak recovery and that would hurt -- but rather to make NOW the plans and commitments to cut spending and raise taxes IN THE FUTURE.

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My Favorite Deficit Myth: Seems to me you missed the most fundamental myth/misunderstanding of the deficit - is it's definition or at least it's definition in Washington. Very few people understand that the "deficit" does not track total government borrowing. As calculated in Washington, the deficit ignores money borrowed from the trust funds. One of the most bizarre effects of this accounting "quirk" is that you can create a "surplus" by using SOME of the money you borrow from the trust funds to pay off publicly held debt. This is exactly what happened at the end of the Clinton administration. The national debt was increasing, but we had substantial surpluses. We then used these "surpluses" to justify cuts to the income tax. Now we are faced with the need to cut Social Security, but if you talk about eliminating the tax cuts that were justified by money borrowed from Social Security, you are accused of class warfare.What am I missing?

William G. Gale: One other aspect of this -- because the Trust Funds basically represent transfers between parts of government, but add to the gross debt, one should always focus on net debt figures not gross debt.

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The sixth myth: When we see the pig fly, that is when we will see the deficit cut!

William G. Gale: It is perhaps worth noting that our founding fathers designed the government to be slow-moving but that may be a bit of a Panglossian interpretation (I saw Candide this weekend).

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The politics of it: It's a political premise of the Tea Party that there will never be a political consensus to cut the biggest ticket items as long as there are other options, so the only way to eventually cut them is to starve the beast first (cut tax income). Is there any other way around?

William G. Gale: I could accept (though not agree with necessarily) the whole "no new taxes" approach to the world if it were accompanied with spending cuts that solved the problem, but you rarely hear that, you mainly hear people rant about taxes (which have been at generational lows the last few years) without suggesting a solution. As I mentioned in the article, that kind of thing is not particularly productive. And we expect high-income households to bear some of the added fiscal burden that comes from solving the crisis, the only way to do that is to raise taxes, since high-income households dont benefit much directly from government spending.

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How defense?: Our military commitments seem to be premised in the 50s -- we're the only superpower capable of patrolling the oceans, keeping nukes in submarines and protecting democratic East Asia from China. What has to be done to create a world military based on modern geopolitics in which Germany and Japan are peaceful, prosperous nations and India and Indonesia are major countries with a role to play? Or can our military not be cut (politically) because there are too many Americans economically dependent on its size?

William G. Gale:

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deficits and productivity: I think it was the great British economist James Meade who, decades ago, demonstrated the common sense proposition that government budget deficits harm productivity only to the degree that the projects they finance are less productive socially than any private projects that they displace. Seen in this light, the difference between using borrowed money to build roads, high speed rail, and bridges and using it to blow up things and bribe local officials in Afghanistan is especially striking.

William G. Gale:

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Lame-duck issues: Okay -- so how do you feel about some of the big issues being taken up in this lame-duck session: extension of the Bush tax cuts, Alternative Minimum Tax relief, and the "doc fix" for Medicare? Can we really afford to do all of this and expect to start "turning the ship around" at the same time? Is there any way to avoid such fiscally-irresponsible "business as usual"?

William G. Gale: The Bush tax cuts are by now means the best way to stimulate the economy right now -- they were never designed as stimulus and CBO listed them 11th out of 11 options in terms of their bang for the buckThe third issue is the long-term situation, which they won't do anything about right now, of course, but which hangs over their heads and at the very least encourages them not to do anything that raises the long-term deficit (like making the tax cuts permanent).

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Effect of current tax cuts on the deficit: Mr. Gale, enjoyed reading your article. R's and D's are clearly divided on the upcoming expiration of the Bush-era tax cuts, and each side is telling different stories on the impact of different plans. In your opinion, what would the effect on the deficit (factoring in the impact on the economy) of allowing all of the tax cuts to expire? What about only allowing the tax cuts on the upper tax brackets to expire?

William G. Gale: CBO has written extensively on this .

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Public sector spending: The federal government's $800 million stimulus was basically a public sector wash, as state and local government spending decreased about the same amount during the same time. Paul Krugman believes without the stimulus funding that unemployment might have reached 13 percent. What are your thoughts on this?

William G. Gale: Interestingly, this phenomenon is neither new (it happened in the 1930s as well, where the states provided no net stimulus over the decade) nor limited to the US (in Japan in the Lost Decade, subnational governments often moved in ways that subverted the aims of federal stimulus). So, count me as a fan of the stimulus package.

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Military: Is it fair to say that military spending is among the least productive economic stimulators that the federal government spends? Do you see much political will yet to seriously consider cutting military spending? Would you advise this?

William G. Gale: I think it is clear that the military should be subject to budget constraints and forced to set priorities and make choices just like the rest of us, but not being a military expert I would not want to make those particular calls myself.

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who will volunteer?: There were news stories last week about "patriotic millionaires" (not to comment on the terminology) who agreed their taxes should be raised for government fiscal reasons. What constituencies make the best targets for "patriotic cuts," that is, who agrees THEIR OWN government outlays should be reduced?

William G. Gale: That's just a first impression, though. It'd be interesting to know if people have thought about this more systematically.

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Deficit v Debt: How concerned should we be over the size of our national debt? It seems astounding to me that anyone lends our government money. Is there any chance we could ever repay the current debt, not to mention how much our deficit spending keeps on adding to it?

William G. Gale: One reason analysts like to focus on the long-term outlook rather than the short-term outlook is that all of the different measures of the deficit give the same answer (bad!) in the long run.

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Poor Us: I find the Fiscal Commission' s proposals to be curious. How does reducing the size of the government workforce, cutting 250,000 contractors, placing monetary restrictions on education and the Department of Justice, and rolling back various administrative agencies serve to create jobs and stimulate the economy? To me, it seems that these proposals will signal the final nail in the social and governmental network left from the New Deal era.and where are reductions to defense spending?

William G. Gale: Cutting the workforce is not going to deal with the long-term deficit though simply because it is not a big enough spending ite,

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The thing is...: we have a spending problem, and not a revenue problem. S eriously. I believe that our federal govt has enough money. And raising taxes will only decrease the amount to the Treasury in the long run, anyway.

William G. Gale: I don't see this, though, as "just" a spending problem.

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Can the President Act Unilaterally?: Can presidents cut the deficit acting unilaterally, and if so what are spending areas in which a president can take such action? If not, have past actions/plans by Congress and presidents been successful in cutting federal deficits, and if so when and by how much?

William G. Gale: There are a few things the President could do, but remember that the vast majority of government spending is on a few items -- defense, SS, Medicare, Medicaid, net interest -- and those can't be affected unilaterally.

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Sustainable National Debt: We all are aware that the current National Debt is not sustainable. What is the range of a sustainable National Debt?

William G. Gale: But we do know that the US is headed down a path that is not sustainable.

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Cost of Medical Care at End of Life: Bill--as you know, cutting the deficit in the long run is going to require serious adjustments to health-care spending. So budget analysts and policymakers are faced with finding the big bucks, so to speak. And by all indications that I've seen, a solid one-third of total Medicare spending goes to chronically ill patients in the last year or two of their lives. I don't want to make this about "death panels," but (as even President Obama has said), there is a real trade-off between simply extending life and extending life in a way that allows the patient to actually enjoy themselves outside the confines of the ICU. So isn't the crux of the long-term deficit problem about Americans' difficulty with facing death? That inability to accept inevitable death is costing billions every year--a recent PBS Frontline episode pegged the cost (roughly) at $20 to $25 billion annually. Our ability to prolong life, regardless of the quality of that life, is a real dilemma--and I don't see how we will ever control medical costs without facing up to this issue.

William G. Gale: A few thoughts on all of this Clearly, if one is not or has the chance to avoid that, the case for spending money is different than if one is. My colleague Henry Aaron has been making this point for almost 30 years now and he's right.

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Agricultural subsidies: Subsidizing farmers and ranchers not only distorts the market, but, in the case of big factory farms, is environmentally destructive. Why is eliminating farm subsidies so rarely mentioned as a way to cut spending?

William G. Gale:

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To say: the Bush 'tax cuts' "aid only high income households" is kind of misleading. Those are the people that have the jobs to give others. When they have less, there would be fewer jobs. It might be getting rid of the lawn guy, getting your hair done less, etc., etc. (or tipping less) - but when you have less you spend less. Why do we think the govt is doing a better job than those with upper incomes? Those are the ones who have the jobs to give. Creating more govt jobs isn't the way to grow an economy.

William G. Gale:

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William G. Gale:


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