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