The necessary, progressive fight to break through today's polarized arguments toward debt reduction

American debtAlmost no one in the public arena has an accurate or realistic understanding of what’s driving the growth of U.S. national debt. The cold, hard truth of the matter is that we’re all to blame for the current state of affairs. Even worse, a real solution to the problem will leave nobody untouched.

Conservatives argue that a program of severe austerity cuts to social services and other wasteful government spending is the key. Liberals, on the other hand, counter by arguing that raising taxes on wealthy individuals and corporations will solve the problem. The American public often calls for cutting foreign aid spending and controlling fraudulent/wasteful spending as a panacea.

In a way, they aren’t wrong or right. They have been deceived by a polarized system which forces them to choose. Each of these steps is part of a larger systemic solution that truly could rein-in the seemingly uncontrollable growth of America’s national debt. In the following paragraphs, I will outline a realistic, bi-partisan approach to controlling our deficits. A progressive approach necessitates a central position within the dialectic, or, similarly that which sees all sides yet takes the side of none in full. Inevitably there are flecks of truth distributed throughout the various Democratic and Republican plans.

Mandatory Spending: Entitlement Programs

First, with respect to entitlements, the term refers specifically to programs such as Medicare, Medicaid, and Social Security. There are numerous other federal programs that fit this bill as well, but many of them – such as unemployment insurance, TANF (Temporary Assistance for Needy Families, or “welfare”), and SNAP (Supplemental Nutrition Assistance Program, or “Food Stamps”) – are counter-cyclical, meaning that they only become active during economic downturns.

While these programs serve highly-important purposes and are an integral part of the much larger system (providing medical care and income supplements to the elderly and lower-income Americans)  it has been argued that they are also the single-biggest driver of long-term American debt growth. The longer we wait to enact common-sense reforms, the more painful the cuts will become. There are a number of simple (though controversial) changes to these programs that may make them fiscally sustainable and preserve them for future generations. There will also be a number of links provided to non-partisan content illustrating the spectrum of opinion on the issue.

The Social Security Administration has even advocated a gradual increase in the retirement age (as life expectancy increases), and the taxable maximum (SSA goal: 90% in 2050). It is also likely that the trust fund charged with fueling Social Security Disability benefits will become insolvent by 2017 unless something is done quickly.

Projected Entitlement Spending CostsFor instance, the financial health of Medicare and Social Security would be improved substantially if FICA (i.e., payroll) taxes were raised above the current 6.2%. Additionally, the federal retirement age could be raised above 67 and 65, the current ages at which Americans become eligible to draw on Social Security and Medicare benefits. Adopting universal healthcare is another method of reducing spending as proven by every country in the developed world.

Tax Revenues

Taxes MUST be increased. I alluded earlier to the need for payroll taxes to be increased to ensure the solvency of Medicare and Social Security, but this alone will not solve the federal government’s fiscal shortfalls. There are a number of possible avenues to increase federal tax revenues, but each has their advantages and disadvantages.

The single most important thing that can be done to improve the federal tax system would be to cut wasteful deductions and credits that act as a de facto entitlement system for middle- and upper-income Americans. Such tax loopholes, like the mortgage interest deduction, charitable giving deductions, and corporate credits like those given to oil companies tend to favor the wealthy and those with less need for superfluous tax credits. The end result is a system of carve-outs for the wealthy and special interests that drive down much-needed tax receipts.

There is another, significant reform that would almost certainly improve the federal government’s balance sheet. This would be to increase capital gains and other investment tax rates. These rates were reduced to historically low levels in the 1980s on the widely-discredited assumption that it would improve economic growth as the wealthy were allowed to keep more of their income to invest in new capital ventures.

In truth, the drastic reduction in capital gains taxes has simply allowed the wealthy to trade capital amongst themselves through stocks and other investment strategies which do not redound to the benefit of the wider society. Instead, this reform has exacerbated income and wealth disparities and led to greater economic instability.

Finally, marginal income tax rates should be reduced so as to offset some of the pain brought on by the cancellation of various tax deductions and credits. Barring the repeal of these tax credits, the country would be well-served by, at a minimum, returning to the tax rates of the Clinton-era. The 2001 and 2003 Bush tax cuts were the most harmful action taken on the revenue-side of the federal budget, so undoing the damage to the federal balance sheet caused by these misguided changes would do a great deal to stabilize federal finances.

American DebtDiscretionary Spending: Defense and Non-Defense

The third series of fiscal reforms aimed at wrangling federal deficits will seem rather counter-intuitive: we need to increase spending on “non-defense discretionary programs” while simultaneously reducing inefficiencies in the defense budget. Contrary to popular wisdom, “foreign aid” spending does not compose 105% of the federal government’s outlays.

Rather, the non-defense discretionary category comprises a mere 12.5% of the federal budget. Even worse, this category includes many types of spending beyond just the oft-maligned “foreign aid”, like research and development spending, transportation/infrastructure investments, and various other technological/human capital investments that drive economic growth and help to minimize the severity of the federal government’s fiscal problems.

Unfortunately,  this most valuable category of government spending (an opinion shared by liberals and conservatives, whether the latter wish to admit it or not) is invariably the first portion of the budget to be chopped by the misguided efforts at deficit reduction each time the clarion call sounds.

This is the same section of the budget that was targeted by the $1 trillion sequestration debacle because it provides Congress with an easy out when constituents demand fiscal responsibility. They can point to severe austerity targeting this spending and claim that they are running the nation’s finances responsibly, but the truth of the matter is that they are actually exacerbating the underlying problem.

American DebtThe final piece of our budgetary puzzle is defense spending, another category of discretionary spending that is often targeted for reductions whenever fiscal hawks set their eyes on slashing government finances. A little discussed fact about America’s defense budget is that approximately half of it is dedicated to personnel expenses like healthcare and pension spending.

It is anathema to discuss cutting military retiree/veteran benefits, and rightly so. However, the fact is that cutting wasteful Pentagon weapons programs and improving contract efficiency can only get us so far; we ultimately must also target this fastest growing and least productive portion of the defense budget.

The Europe Question and Path Dependence

It is obvious that change is needed. The nature of that necessary alteration is, however, that which remains hidden to the average eye. In recent years western Europe has seen a wave of austerity cuts aimed at reigning in government spending.

Path Dependence Theory asserts that systems of interacting individuals make decisions within a highly-limited and closely-controlled range. Simply put, path dependence dictates that the politicians of today are simply not as free to act as we believe them to be. Those who are elected are at least somewhat accountable to their electorate (although some examples could prove otherwise).

In order to remain in office, those individuals often find it much easier (and, in fact, necessary) to pander to whichever groups are the most influential (often those who scream the loudest/have the biggest wallets). This is that which defines the role of most politicians in office. Necessarily as the system has evolved over time, successive generations have had very different experiences of programs like Social Security.

Those voters (especially in Europe) now reaching maturity have grown up in a relatively “entitlement-soaked” world, at least in stark comparison to their predecessors not only a century ago. This has habituated the population to receiving entitlements (Republicans argue the same thing yet fail to realize that essential and beneficial sectors of the economy can, indeed, grow out of government money). Problems arise, however, when markets (specifically currencies like the Euro) change. Much is riding on the solidity and stability of the US dollar, if things do not change quickly there will be a much longer road ahead to recovery.

One could easily see the relatively-recent economic uncertainty in Europe as evidence for this. Indeed, although in many ways countries like Spain, Italy, Greece, and Portugal are not comparable to the United States, some trends transcend most other discouraging variables. With this being said, it is clear that other European countries, like Switzerland, are far more stable. This indicates that higher government spending in the future by itself will not lead to the utter destruction of all life on earth (as many conservatives have a talent for convincing the less-informed). However, once again correlation is not causation. Switzerland is tiny, the United States by comparison is a behemoth.

So What Can We Do?

If your political leanings cause you to take issue with my analysis of where we are as a country, then don’t take my word for it. None other than Nate Silver, the acclaimed statistical wizard that predicted 2012 electoral results with stunning accuracy. His article analyzing the growth of government spending for the last few decades largely comports with my own analysis above (and provides significantly more quantitative and analytical detail than I could fit into this article).

This is an issue of such major importance for the future of the United States that I consider it a solemn duty of my generation and generations thereafter to solve it and maintain proper fiscal balance for U.S. government spending. Without taking these steps or a similar approach, we are indebting ourselves, our children, and our children’s children and consigning them to a future darker than that which we were given by our parents. Perhaps worse, we are weakening our position relative to other rising powers in the world, making us less competitive with India, China, and rapidly developing countries. We have to fix this—and we should do it while there’s still time.

Links of Interest:

2014 US Budget

White House Budget Overview

White House Budget Goals 2015

Office of Management and Budget

Social Security Administration FAQ

Report of the National Commission on Fiscal Responsibility and Reform

 

I'm currently a graduate student in political science at the University of Kansas, writing my master's thesis about the interplay between institutional structures in political systems and government spending patterns (it's even less interesting than it sounds). Much of my free time is dedicated to obsessively listening to news podcasts and reading news articles so, I figured "ehh, what the hell, I might as well put some of that knowledge to work." So, here I am.

20 COMMENTS

  1. Mike,

    You write “The cold, hard truth of the matter is that we’re all to blame for the current state of affairs.”

    This looks like the favourite bad habit of the current press, mindless equivalence, to me.

    THe present disarray in American Federal finances is explained by three things, Republican tax cuts, Republican wars, and Republican bad economics which makes impossible a New Deal style roads, dams and bridges program which would get the economy moving again.

    If you want to spread blame around, go looking at the different, and conflicting, tendencies among the GOP mobs which brought these three different policies to pass.

    Cheers,

    -dlj.

    • Sorry, Kyle, not Mike,

      …and once you get past your false equivalence boilerplate at the beginning, your semi-technical discussion of actual budgeting is a fine piece of work. But it’s a discussion of budget incidentals, not a look at the cause of our problems.

      -dlj.

    • David,

      I would agree with you up to a point; blame for the current state of affairs largely rests upon the shoulders of Republicans. However, longer-term debt issues (which are by far the more serious) are a result of the unfettered expansion of entitlement programs without commensurate tax increases/revenue provisions. You’re wrong insofar as you blame the entirety of the problem on Republicans. I could go into fine-grained detail about how this problem has roots running deeper even than the 1981 and 1983 Reagan tax cuts and talk about how Richard Nixon (a Republican) increased Social Security benefits at a time when the program was already beginning to show early signs of insolvency, largely in order to secure his own reelection.

      I could step back even further and discuss how the Second Liberty Bond Act of 1917 established the debt ceiling that has caused so much vitriolic rhetoric and near-economic catastrophe by grandstanding morons IN BOTH PARTIES since it was created. I could have talked about how the broken budgeting process established by the 1974 Budget and Impoundment Control Act has led to so much inter-committee conflict and the use of the budget process as a weapon to extract political concessions from both sides of the aisle.

      I could have even expanded my “semi-technical discussion” of the budget process to include more detailed descriptions of the distinction between discretionary and mandatory spending (and the fact that mandatory spending on entitlement programs is slowly crowding out spending for more economically efficient and effective discretionary investments). I could have talked about all of these things, but that was not the point of this article.

      Blaming one party that you disagree with is easy, but it’s not going to help us solve the problem. Finger pointing is what has kept us in this mess for so long. It’s time to admit the truth that over the long-term the numbers simply don’t line up for Social Security and Medicare spending (if you read the entire article, you’d come to see that). I’m not advocating for cutting benefits in half and sending people my grandparents’ age into the streets to stand in bread lines while they wither away from preventable diseases–that’s the kind of absurdity that Democratic bomb throwers hurl at even President Obama when he proposes something as simple as raising the retirement age.

      Taxes should be increased (like I say in the article), but entitlements also need to be brought under control. The trust fund money in Social Security is in some sense a facade. The Iraq War and other “anti-terror” campaigns have largely been paid for by off-budget borrowed money (a practice which President Obama, Harry Reid, and Nancy Pelosi chose to continue). I wrote a 100-page thesis paper about this topic, so if that’s not enough to qualify me as at least a quasi-expert about this issue, then no one truly is. If you’d like to discuss it more, I’d be happy to, but do all you can to learn more yourself. You’ll come to see that the Democratic dogma about the budget is incorrect; not nearly as incorrect as the Republican Party’s dogma, but neither side has a monopoly on ideas that will work to fix this problem.

      Thanks for reading it,
      Kyle

      • Kyle,

        Not bad, but you’ve gotta watch yourself: you ding me for simplicity in blaming Republicans, and then fall into an even more micro-local concentration on the magic (in some parts of Kansas, that is) words “Pelosi” and “Reid.”

        I do agree with you that there’s an adequate supply of morons in both parties. On the other hand I don’t think they’re a lot of the problem. Would that we had a moron in the office of the rather bright Darell Issa! When I worked for the Congress my boss was a Rhodes Scholar, and some of the things he did, just drifting along with the system, drove me to distraction.

        The system worked quite nicely for about forty years in there, and I have a hypothesis — and I’d like it if you passed it around at the good folks at UKan. I don’t know your polisci folks, but always admired your History Department. Here it is: for a couple of generations in there Congress functioned very nicely under an extra-Constitutional fix crafted by Sam Rayburn; the fix was, he balanced the chairmen of the authorizing committees, largely liberals, with knowledgeable and sensible, though conservative, chairmen of the matching appropriating subcommittees and committees.

        Now there’s enough work to be done tracking down all those subcommittee chairmen from say 1934 to 1958 to fuel a passel of PhDs — but I’d bet it would be paper well spent. And I betcha I’m right, and I take pure joy in the silent suffering it would bring to my good friend Newt, to see the holes this punches in the fake easy rationalism of his 1994 contract put out on America. Term limits and the appointment of chairmen for purely partisan-electoral advantage both look sensible, and are two of the stupidest reforms ever perpetrated on the American polity.

        Newt and I have followed each other’s careers for roughly 42 years now, and, like Bill Clinton, I take pleasure in watching his fine mind at work, and pity at seeing him struggle with his weaknesses. The fundamental contradiction of his being a large mind trapped on the small plantation of his owner, the Cannon Mills manufacturing corporation, has been a sorrow for America.

        For the future I see little hope until the present clown-car SCOTUS dies off, (unless we are blessed with a Congress that will impeach the perjurers Thomas and Roberts), and a new Bullmoose Party is built on the wreckage of the present entirely rotten collection of GOP mobs.

        Fortunately the self-destruction of the Republican Party is moving along nicely; The right wing’s love for burning places down in order to save them is sometimes good to see. America is fundamentally sound, and the American people even sounder, so things aren’t too bad, all considered.

        Everything you have written about the bankruptcy of the American welfare state is nonsense, so I assume you learned arithmetic in the US public school system. On the systemic threat of the baby boomers retiring, I’ll give you another hint that you can share with your polisci department: people’s marginal net propensity to invest increases monotonically by age cohort; the sudden withdrawal of savings by retirees as a whole is simply nonexistent.

        Cheers,

        -dlj.

    • Dear God, it would be great if people could simply read the names attached to the comments on this thread.

      Ronald,

      I DIDN’T respond to your last comment because I was too busy arguing with Rusty (the person who actually did reply to your comment while also wrongly assuming you were me) about entitlement reform. Now, however, I’ve got a challenge from the Right rather than the Left, so I’m going to be even more vociferous in shutting down your argument point by point.

      1. QE is the one thing that has kept the economy alive in the last five years because fiscal stimulus has been utterly hamstrung since Republicans took control of the House in 2010. The American Recovery and Reinvestment Act, in addition to the Troubled Asset Relief Program, are the two things that in concert saved the United States economy and, frankly, the entire global financial system from complete collapse. That’s Economics 101 for you… And while you’re incorrectly aimed assault on Rusty’s comment is probably correct in accusing him of being a Keynesian, I also happen to believe in the basic principles of Keynesian economics. Monetary policy is now the one tool keeping the financial system afloat, so if we enacted your insane–Laffer Curve nonsense-inspired plan, the global economy would implode in on itself within weeks.

      2. You are correct to some extent about the Medicare and Social Security Trust Funds being illusory in some sense, the only problem is that I ALLUDE TO THE SAME POINT in the article above… I sure wish you had actually understood anything you read (assuming you even read it). Republican solutions to entitlement reform, however, are absurd. They offer general principles that are sound, but the specifics offered by the likes of Paul Ryan and other Randian pseudo-economists use a chainsaw where a scalpel is required. These policies would also plunge the United States back into economic chaos because they would remove essential monies from the country’s economic engine.

      3. The New Deal actually in large part built the modern United States… Infrastructure funding and other programs were a large part of the sluggish recovery that brought this country back from the depths of the Great Depression. World War II was the ultimate catalyst for the United States’ stunning postwar growth, but the New Deal played a part as well. Want proof? In 1937 when Republicans took back the Senate and pushed a package of deep austerity the country immediately fell back into recession. Republican economics are a bankrupt system of useless voodoo.

      4. This is my favorite one. Reagan’s tax cuts utterly destroyed the federal government’s finances. Additionally, he was responsible for the largest peacetime TAX INCREASE up to that point in U.S. history after pushing the the largest peacetime tax cut in his first term. Receipts doubled during his presidency because he raised taxes six times, largely to undo the damage caused by his initial tax cuts that blew a hole in the federal budget. The federal government’s debt tripled from around $800 billion to nearly $2.5 trillion during President Reagan’s eight years in office as well, but that bit of truth probably wasn’t contained in your mythological version of the 1980s. By the way, when you argue that “letting people spend more of their money” creates jobs, you’re making a Keynesian argument. Just thought you should know!

      5. And the $6 trillion that you keep droning on about includes all federal, state, and local taxes in addition to all excise fees and other forms of revenue. People like you don’t seem to realize that the government, at all levels, actually serves fundamentally important purposes in your everyday life and that, without it, the United States would have remained a backwater great power at best, rather than the superpower that we stand as today.

      Please, please, please, I implore you! Read a book written by a nonpartisan source. And as for your citation, if you promise to never cite Cato or Heritage to me, I’ll promise to never cite the Center for American Progress or some such other liberal-leaning think tank to you. Any think tank that begins from an ideological viewpoint is incapable of providing unbiased analysis or information as far as I’m concerned.

      P.S.
      Don’t ask about my family or my own income. If you must know, my parents make $170,000 jointly before taxes, so if I remember correctly their rate stands around 30% or higher… Quite likely more than is “confiscated” from you and yours. I appreciate your role as this site’s resident comment troll, but don’t ever go personal like that. It only makes you seem more pathetic and undermines your argument even further than your utter lack of facts or your total detachment from reality already do.

    • Ronald,

      You puke out “Well after your initial boorish, arrogant, prepubescent remark to me…”

      What I said was that your inane economic claim — that the products of the Federal Reserve needs to be repaid — showed you running naked through the streets demanding that people worship your nice new tuxedo.

      This was wrong of me: it gives you the mixed dignity of a foolish emperor, of the new clothes tale, mixed with the image of Archimedes running shouting through the streets. Both give you a stature you do not deserve, so I withdraw the remark.

      Your stupid economic post shows you to be a fool pure and simple.

      The current post, in which you pile on a bunch of ignorant Republican talking points, confirms the fact.

      Yrs. etc.

      -dlj.

      • “They also hold whole gobs of treaury notes which makes the US govt a debtor to the federal reserve”

        So what?

        Ronald,

        Were you posting to show off that you’ve thought of a new childish insult, or to show that you’ve noticed that sidewalks are horizontal while walls go up and down? What you say here is mostly true, and utterly irrelevant to any of the questions the grown-ups are discussing here. Or even the PhD students…

        -dlj.

        • Ronald,

          “But my question to you is- can you be civil in you rposting or does your arrogance require you to insult those you deem inferior to you?” you ask.

          “boorish, arrogant, prepubescent remark” were your words, not mine….

          -dlj.

        • Ronald,

          You misquote me. I didn’t say the Federal government wasn’t indebted, etc.

          I simply pointed out that the QE money didn’t have to be repaid. The same is true, too, for the other kinds of debt that you are dragging in for no relevant reason now.

          Money is always and everywhere an artificial creation, all the way back to the leather tags which landlords gave arbitrary value to in feudal Europe, and the paper money when it was invented in China. There is very often a notional double-entry accounting system accompanying the money-creation scheme; sometimes there isn’t.

          People who confuse these debits and credits with debts like yours to your credit card company are often people who talk about an economy like a cookie jar, which it isn’t, rather than like a machine, which in many senses it is.

          In the United States Democrats work on the machine metaphor, and are concerned about making it run as well as possible. Republicans, by contrast, tend to think of it as a cookie jar, and dip their fingers in when the electorate isn’t looking.

          This juvenile delinquent behavior appeals to them because it confirms their opinion that government is crooked.

          -dlj.

  2. Any attempt to distill the economic forces/issues driving our national debt and offer solutions within the space of a brief essay is worthy of praise for, if nothing else, ambition. And the fact of the matter is that you actually were able to name the majority of those economic forces/issues driving both the situation and the debate about it.

    One initial suggestion I will be presumptuous enough to make is that it might be worth it to distinguish between the countries of northern Europe and those of southern Europe per the metrics and comparables of the European financial downturn.

    Tangential to those distinctions would be a focus on a factor that is mostly ignored but primarily responsible for the severity of the economic meltdown in both Italy and Greece—the almost total absence of a comprehensive, coherent system of tax-collection.

    Conservative economists have focused on “entitlement spending” in both Italy and Greece as a way of pushing their now-debunked austerity theories—austerity economics inevitably damage only those who can least afford any more damage, as the GOP House version of austerity has proven in the U.S. What they have purposefully neglected—because they simply don’t like talking about taxes unless the word “tax” is followed by the word “cut”—is the fact that the lack of anything that approached a workable system of revenue collection went hand-in-hand with excess spending to create the bottom-line issues in both Italy and Greece.

    Thanks again for an admirable effort. I would add only two words that, were they subtracted from the American tax code, would make an enormous difference: “carried interest.”

    • Kyle,

      You write “all teh bond purchases via Quantative Easing is part of the debt (not listed for it is inner transfers) but nonetheless are funds that the fed has to pay back.”

      This is not merely untrue, but shows an almost total economic vacuum in your knowledge. You’ve just stumbled into the street naked, shouting “Look at my lovely new tuxedo!”

      You are going to have to do two things to get started: on this particular question I suggest you folllow your Google train until you are confident you know where money comes from. Hint: no, those dollar bills don’t need to be “paid back.”

      Second, to even consider taking part in this discussion I suggest you get it clear to yourself that an economy is not a cookie jar, nor is it a kitchen table where bills and piled and month-end cheques are written.

      If you’re going to deal in metaphors — rather than thinking of an economy as an economy — consider the machine as your metaphor. You are quite right that the American economy is underperforming; many people are not producing, and many parts are producing backwards, destroying, producing bads instead of goods.

      Keynes — or the standard Arrow-Debreu model if you like — remains the best body of work on how to get the machine running. This is not a matter of ideology — though powerful moneyed forces out there on the Plains would have you think so. Keynes is simply the closest thing we have, flawed though it be, to the operating manual for the machine.

      -dlj.

      • Try reading a bit more closely David… Last I checked, my name isn’t Ronald. Why would I argue that taxes don’t need to be raised when the spectral opposite was a fundamental point in my article?

        • Kyle,

          This is a bad slip on my part, and I apologise. I trust you will see that I have nothing to gain, and only lose credibility, through making a mis-attribution; hence it cannot have been deliberate on my part.

          It was a stupid accident, and I apologise both to you and to any others I may have misled.

          Other disagreements remain, of course, and I’ll probably have a bit more to say in a day or so.

          Cheers,

          -dlj.

      • And as a response to your earlier reply, I don’t see how I’m thin-skinned here. If anything, once your argument was completely shut down by empirical evidence, you rather blithely decided to go ad hominem.

        Further, once the evidence completely stacked against you, you changed the nature of yout argument. I’m not arguing that we don’t have a normative duty to care for the poor, the stricken, and the elderly. Rather, I’m saying that we must do so to the extent possible given the strictures placed upon us by mathematical and geopolitical realities. I’d love to give every man, woman, and child on this planet a million-dollar check and sprout rainbows with my magic wand, but that’s idealistic dribble.

        And as for my “fine googling,” I’ll say two things: (1) I’ve read the vast majority of those things I cited above through my graduate-level studies of this subject; and (2) Googling seems to be more than you’re capable of yourself.

        Cheers

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