Two years ago, Adm. Mike Mullen, at the time the chairman of the Joint Chiefs of Staff, said that debt was the “single biggest threat to our national security” not some rogue nation, or terrorist group, but debt. What makes the threat of exploding debt especially dangerous is that it’s not like a faucet that can be easily turned down. Federal, state and city governments in the United States have lost their fiscal grip, and the saga of Detroit’s bankruptcy is just one example.
Astonishingly, when the Congressional Budget Office recently lowered its forecast of future deficits, many voices on the left claimed that the problem had been overblown by “austerity scaremongers” (that’s us). Even more astonishingly, some voices on the right have renewed calls to “starve the beast” now that deficits are supposedly under control.
Both responses are wrong, but for different reasons.
First, “the deficit is now under control” fallacy. The C.B.O. did indeed say that the average federal budget deficit would be $62 billion lower per year than was predicted before. That sounds good, but it lacks context. The C.B.O. still anticipates a 2015 deficit of $378 billion. And Uncle Sam is heading and this is the best-case scenario toward nearly a trillion dollars of red ink every year after 2023. In an effort to alert Congress to the danger, the C.B.O. also publishes a more realistic alternative fiscal scenario that anticipates how much will actually be spent by the Treasury in the coming decade. The realistic scenario predicts $1.76 trillion more in debt than the old baseline. For anyone willing to question authority, it gets worse. Both official scenarios naïvely assume a return to old norms of full employment, robust growth and moderate interest rates. How many unfulfilled summers of recovery will pass before policy makers will adjust that rosy outlook?
The still larger problem lies with Republicans who refuse to face facts. “Starve the beast” has been the mantra of conservatives since Ronald Reagan was president, a belief that, if taxes were low enough for long enough, rational Democrats would have no choice but to agree to bring federal spending down as well. Even though total federal revenue held level at around 18 percent of gross domestic product in recent decades, spending soared. When Reagan was sworn into office, gross federal debt equaled 32.5 percent of G.D.P. Under President Obama’s leadership, it has risen above 100 percent.
We are stuck in a bad and worsening place: sure, deficits strike fear in the hearts of economists and intellectuals, but they don’t matter at the ballot box. Jobs matter. Growth rates matter. Wars matter. Deficits? Yawn.
This outcome wasn’t what conservative experts predicted. Alan Greenspan trusted in 1978 that there was “a political limit to deficit spending.” In the presidential debates of 1980, Reagan said that tax cuts would act like cutting the allowance of spendthrift children (in Congress). Scholars like Milton Friedman and Robert Barro voiced support for starving the beast. But William A. Niskanen, a Reagan administration economist and former chairman of the libertarian Cato Institute, studied the effect of starving the beast at the end of his career and concluded that it was impotent. Mr. Niskanen’s finding was that fiscal deficits led to higher, not lower, federal outlays.
Deficits create a “fiscal illusion” that public goods and transfer payments are less expensive than they are. Once politicians learned that voters were tolerant of deficits of millions of dollars, they responded with deficits of billions of dollars, and now a trillion-dollar deficit.
Let’s admit it, then. Conservatives were wrong not in beliefs that higher marginal tax rates harm growth, not that debt is dangerous, but about strategy. The beast was not starved.
The name of the game, as many younger senators and House members have realized, is spending control. Congress has tried internal reforms before Gramm-Rudman-Hollings in 1985, Paygo in the 1990s but they did not last. If we are to restore economic sobriety and intergenerational fairness to the budget, a more binding solution may be needed.
Starting with loosely binding ropes, Congress should modify the budget treatment of entitlement programs. The federal government continues to analyze Social Security and Medicare through the lens of cash accounting: counting up the costs of new long-term obligations not in the year the obligation is made, but off in the distant future when they must be paid. Private firms must accumulate funds to meet their pension obligations, why not Uncle Sam? This kind of rule in Detroit would have saved the city, and its workers, from the mess they’re in today. Changes in the accrued liabilities of Social Security and Medicare, in particular, should be assessed on the federal budget each year. That change would force elected officials to make the tough choices now raising taxes, cutting other spending or reforming entitlements instead of punting to tomorrow.
But tighter ropes may be needed. Perhaps a 28th Amendment to the Constitution requiring a balanced budget. While this idea may appear radical, it is favored by about 70 percent of Americans.
The amendment may be forced on Congress, given that 32 states have petitioned for its adoption since 1975, two states shy of the constitutional trigger. In 1982, 1995 and 2011, some version of balanced-budget legislation passed one but not both chambers of Congress. Those early amendment drafts had many critics, both Democratic and Republican, and many of their criticisms were valid. Successive versions became more of a small-government litmus test than a solution. Let’s fix that.
If our goal is to “balance” instead of just “starve” the federal beast, the amendment will trust voters to choose the amount of government it wants so long as the sticker price is honest, and there will be as many Democratic senators on board as Republicans. Here are three practical modifications that Congress should consider in a new balanced budget amendment.
First, because reconciling expenditures and revenues would be impossible in real time, the constraint should be on expenditures only. A good rule would be this: Congress shall spend no more in the current year than it collected, on average, over the previous seven years. No more overspending in fat years and no draconian cuts to expenditures during future recessions.
Second, any amendment should be simple, focused only on fiscal balance. The best mix of tax and expenditure changes is for each generation of voters to decide.
Third, there should be an exception to the spending constraint for national emergencies.
America’s high and rising national debt threatens our economic health through higher future taxes, crowding out important government services, or both. The best antidote is a focus on economic growth and a balanced approach to deficit control.
It is time to “balance the beast.”
R. Glenn Hubbard, dean of the Columbia Business School, was a chairman of the Council of Economic Advisers under President George W. Bush. Tim Kane is the chief economist of the Hudson Institute. They are the authors of “Balance: The Economics of Great Powers From Ancient Rome to Modern America.”