A Path to Fiscal Sanity

by Jagadeesh Gokhale

Cut the deficit by spending less? Sounds crazy, but it just might work.

It has been known since the early 1980s that the U.S. federal budget embodies a large structural imbalance — one that persists through the economy's ups and downs. In 1980, Ted Kennedy referred to this during his campaign for the presidency; Bush I, Clinton, Bush II, and Obama commented on it during theirs.

Estimates of how large this imbalance is, and of what it would take to solve it, have been available for two decades. These analyses consistently show two things: It would be costly to put off dealing with the problem, and federal debt will surge once the baby-boomers begin to retire during the late 2000s.

They are retiring now.

When questioned on entitlement reforms, legislators dutifully genuflect to the need for policy adjustments. But until now, that budget fix was one for the future. Immediately after being elected, lawmakers adopted a "business as usual" attitude, seeking more benefits for today's voters by appropriating vast sums for their pet projects.

And again, in the aftermath of the 2008 financial meltdown, policymakers on both sides of the aisle scrambled to bail out banks, automakers, insurance companies, traders, consumers, and so on, and the Fed injected huge amounts of cash into the financial markets. The cherry on top of this spending binge is the Obama administration's proposed health-care "reform" — which entails additional trillions of dollars.

The recent announcement that U.S. deficits will total $9 trillion over the next ten years suggests that "business as usual" will rapidly come to an end. That's the problem with long-term budget constraints — they inexorably draw closer, eventually forcing hasty and ill-conceived policies via a budget crisis.

What to do?

Estimates from the Social Security and Medicare trustees and the Congressional Budget Office, academic studies, and other reports suggest that the total federal fiscal imbalance amounts to 8 percent of future U.S. productive capacity. Since only about one-half of the nation's total income is subject to taxes, Americans would have to immediately and permanently devote another 16 percent of their taxable incomes toward resolving it. READ MORE