Fiscal Follies: Is Slamming the Brakes on Spending Such a Good Idea?
Thursday, March 31st, 2011Between them, Presidents Bush and Obama have added a cool $8.5 trillion to the federal debt. In January 2001, the countrys debt was $5.7 trillion. Today, were at $14.2 trillion and counting. And the astonishing fact is that Presidents Bush and Obama arent that unusual in presiding over governments that spend more than they take in. Deficit spending has been routine in Washington for decades — in Republican and Democratic administrations alike, whether the economy was booming or weak. The US government has actually operated in the red for 31 out of the last 35 years.
So now we have to reverse course. We have already accumulated an enormous debt, and we face skyrocketing health care costs for an aging population over the next few decades. Finally, theres some broad agreement that we cant go on like this. All the federal budget agencies, independent commissions, the bond analysts end up using the same word to describe the projections for the national debt: unsustainable. The big argument now is over whether to take our foot off the gas pedal and slow down gradually or whether to slam on the brakes.
Right now, Congress is in an uproar looking for ways to cut expenditures between now and September, the end of this fiscal year. A lot of the newly elected members, including the Tea Party backers, are basically calling for slamming on the brakes. Yet so far theyre also only focusing on some fairly small pockets of spending. We have no doubt that some of these cuts are way overdue, but the way Congress is going about it is the worst of both worlds: the changes are too rushed to be smart and too small to make a difference. Meanwhile, Congress continues to postpone decisions on the more fundamental, long-term changes we need to make.
We dont want to take the brake analogy too far, but people generally slam on the brakes when theres no other choice. Stopping suddenly is risky–whiplash, rear end collisions, and losing control of the car are all possibilities. Its what you do in a full-out emergency: either you hit the brakes, or you crash into something.
But thats not our situation with the federal budget–at least not right now . In fact, most of the advice from economists and experts outside of Congress calls for a more gradual, measured, consistent, and deliberate approach.
Among Wall Street cognoscenti, Bill Gross is the new Alan Greenspan: his every action and utterance is scrutinized for its economic import. Gross, who heads the bond trading giant Pimco, got rid of his holdings of US Treasury bonds earlier this year , a signal that the US government should get its act together on the budget if ever there was one. But Gross doesnt expect or recommend a flurry of sudden budget cuts . Lets cut the deficit, Gross recently told Reuters, but lets do it gradually. Gross is worried about undermining the economic recovery with too much cutting, too fast, and so are many others.
The various fiscal commission reports all go gradual. The so-called Simpson-Bowles plan that emerged from the National Commission on Fiscal Responsibility and Reform suggests freezing spending (not slashing it) beginning in 2012 after the economy picks up steam. The commissioners took an even more gradual approach to Social Security. They suggest upping the normal retirement age to 68 by 2050 and 69 by 2075. Thats an upsetting idea for a lot of people, but if were going to do it, at least doing it gradually gives everyone time to adjust.
Donald Marron, a former acting director of the Congressional Budget Office who now heads the Tax Policy Center, recently posed the question of why Congress seems so focused on making near-term cuts and doing it in such a hurry. As he points out, America faces trillions of dollars in deficits in coming years. But Congress has been reduced to funding the government three weeks at a time so it can fight over mere billions.
Marron believes members of Congress are falling into a classic time management dilemma. Rather than working to solve deep-seated, long-term problems, Marron points out, people get caught up in near-term mini-crises–Congress has to pass a bill quickly so the government doesnt shut down on April 8 or it needs to broker a deal to raise the debt ceiling this spring to avoid rattling international bond markets.
The upshot, Marron argues, is that the urgent crowds out the important, and potentially ruinous problems get even worse. The United States needs to reform Medicare, Medicaid, Social Security, and defense because thats where the big money is going. In these areas, making cuts carefully and thoughtfully is paramount. And we cant solve the countrys budget problems without looking at taxes. To make any genuine headway there, we need to clean up our mess of a tax code. There are plenty good ideas out there, but it will still take time to craft the deal. And if were going to eliminate any of the big deductions, for health care or home mortgages for example, doing it gradually will make it less jolting.
So lets go back to the brakes for one more round. If youve ever driven on a sheet of ice, you probably know that experts tell you to never, ever slam on the brakes–thats what causes an uncontrolled skid. When stopping, plan well in advance and slowly add pressure is the recommended course of action. And when you feel the wheels slipping, it takes some self-control and determination to follow that excellent piece of advice.
Maybe thats what we need here–the willpower and guts to stop slowly and safely. Rushing spending cuts through Congress now may feel good, but the reality is that it doesnt actually get us very far.