A FEW years ago a prominent former treasury official came to lunch at The Economist
and predicted that the debt level would become a national
preoccupation. He expected Americans would grow weary of a large debt
burden, but refused to say whether Americans would demand fewer services
or higher taxes as a result. It turns out he was correct: Americans are
both concerned about the nation's debt, and confused about how to solve
the problem.
Often lost in this confusion is the important distinction
between the current deficit (not such a big deal) and the long-term
structural debt (a big problem). The best solution for paying down
America's long-term debt is some combination of spending cuts and tax
increases. And if you listen closely to both Republicans and Democrats
(at least the non-crazy ones) they actually seem to agree on that.
Unfortunately they're talking past each other.
This post
by Jonathan Chait illustrates the point. He accuses Glenn Hubbard,
an advisor to Mitt Romney and Dean of Columbia Business School (full
disclosure: I was once his student), of misunderstanding the extent of
the long-term debt problem. Referencing the chart below, Mr Hubbard claims that the debt problem is real, largely caused by increases in future spending, and may result in very high future taxes.
We see two scenarios in these charts. The
extended-baseline scenario assumes current laws (like the expiration of
the Bush tax cuts and the implementation of Obamacare) will not be
changed in the future, while the alternative fiscal scenario assumes
that "widely expected" changes to current law (ie, revenue as a % of GDP
remains the same and entitlement spending is not meaningfully cut) come
to pass. According to the CBO, the extended-baseline scenario—what it
takes to keep debt levels stable—poses significant costs.
"Revenues
would reach 23 percent of GDP by 2035—much higher than has typically
been seen in recent decades—and would grow to larger percentages
thereafter. At the same time, under this scenario, government spending
on everything other than the major mandatory health care programs,
Social Security, and interest on federal debt—activities such as
national defense and a wide variety of domestic programs—would decline
to the lowest percentage of GDP since before World War II."
Mr
Chait accuses Mr Hubbard of misreading the chart and pushing a
lop-sided agenda focused on cutting spending. But Mr Hubbard's position
is simply that long-term spending is unsustainable and that the debt
problem cannot be solved by tax increases alone. That conclusion is not
so different from the research Mr Chait cites from the Center for American Progress, a liberal think tank. There is more common ground here than Mr Chait lets on.
Cutting
entitlements and raising future taxes does not necessarily leave people
worse off. People live progressively longer and the quality of
health-care services, so far, has increased and gotten more expensive.
So in principle, you can decrease the length of retirement or the level
of benefits paid (especially to higher earners who live longer) and
still provide a similar present value of real benefits to future
generations. A problem with entitlements is that each new generation
expects more than the last, longer retirement and the latest and
greatest in health-care technology.
Record-high
levels of revenue as a percent of GDP may not be so bad either, so long
as society gets progressively richer. Taxing citizens 30% of GDP is a
much bigger deal in Angola than Denmark because Angolans have much less
income to spare. Though for developed countries the distributional
consequences are tricky if income inequality continues to widen. Also
there can be second order effects from higher taxes, resulting in lower
growth. Fairness to future generations is also important. Punting reform
to the future makes it more expensive and places a large burden on the
young. Striking the right balance is hard, but possible, and the sooner
the better. It is not clear that the current law, associated with the
extended baseline scenario, gets it right. That probably requires a more
efficent tax code and redefining retirement expectations. It belabours
the point of just how necessary a thoughtful dialogue is.
The Economist - 'Not so far apart'
Often lost in this confusion is the important distinction between the current deficit (not such a big deal) and the long-term structural debt (a big problem). The best solution for paying down America's long-term debt is some combination of spending cuts and tax increases. And if you listen closely to both Republicans and Democrats (at least the non-crazy ones) they actually seem to agree on that. Unfortunately they're talking past each other.
This post by Jonathan Chait illustrates the point. He accuses Glenn Hubbard, an advisor to Mitt Romney and Dean of Columbia Business School (full disclosure: I was once his student), of misunderstanding the extent of the long-term debt problem. Referencing the chart below, Mr Hubbard claims that the debt problem is real, largely caused by increases in future spending, and may result in very high future taxes.
We see two scenarios in these charts. The extended-baseline scenario assumes current laws (like the expiration of the Bush tax cuts and the implementation of Obamacare) will not be changed in the future, while the alternative fiscal scenario assumes that "widely expected" changes to current law (ie, revenue as a % of GDP remains the same and entitlement spending is not meaningfully cut) come to pass. According to the CBO, the extended-baseline scenario—what it takes to keep debt levels stable—poses significant costs.
Mr Chait accuses Mr Hubbard of misreading the chart and pushing a lop-sided agenda focused on cutting spending. But Mr Hubbard's position is simply that long-term spending is unsustainable and that the debt problem cannot be solved by tax increases alone. That conclusion is not so different from the research Mr Chait cites from the Center for American Progress, a liberal think tank. There is more common ground here than Mr Chait lets on.
Cutting entitlements and raising future taxes does not necessarily leave people worse off. People live progressively longer and the quality of health-care services, so far, has increased and gotten more expensive. So in principle, you can decrease the length of retirement or the level of benefits paid (especially to higher earners who live longer) and still provide a similar present value of real benefits to future generations. A problem with entitlements is that each new generation expects more than the last, longer retirement and the latest and greatest in health-care technology.
Record-high levels of revenue as a percent of GDP may not be so bad either, so long as society gets progressively richer. Taxing citizens 30% of GDP is a much bigger deal in Angola than Denmark because Angolans have much less income to spare. Though for developed countries the distributional consequences are tricky if income inequality continues to widen. Also there can be second order effects from higher taxes, resulting in lower growth. Fairness to future generations is also important. Punting reform to the future makes it more expensive and places a large burden on the young. Striking the right balance is hard, but possible, and the sooner the better. It is not clear that the current law, associated with the extended baseline scenario, gets it right. That probably requires a more efficent tax code and redefining retirement expectations. It belabours the point of just how necessary a thoughtful dialogue is.
By A.C.S., Free Exchange, TheEconomist.com