With the president’s highly touted jobs speech this week, national attention is about to pivot from deficits and debt — where the focus has been for much of the summer — to jobs and how to boost the struggling economic recovery.
You can almost hear the sighs of relief coming from the halls of Congress and the White House, because even though there is vehement disagreement over what should be done to fix the economy, the types of measures that will be floated are ever so much more fun from a political perspective. What politician doesn’t prefer to talk about tax cuts and government spending that doesn’t have to be paid for, as opposed to the spending cuts and tax increases required to close that gaping deficit hole?
The reality, however, is that these two issues can’t be separated. Any further measures to stimulate the economy are unlikely to move other than as part of broader debt reduction. More importantly, done right, a smart debt-reduction plan is absolutely central to an economic-growth agenda.
In the short term, due to expiring tax and spending provisions, between $250 billion and $300 billion will be removed from the economy at the end of the year, if policies such as the payroll tax holiday and unemployment benefits are not extended or replaced. The principle here should be “Do no harm.” Now is not the time to be pulling resources from the economy. At a minimum, stimulative measures of at least the same amount should be extended for another year.
Given the spate of discouraging economic news, probably much more should be done. But there is no more room in the budget to treat these measures as fiscal freebies.
Instead, they need to be paid for over a reasonable period of time, say, five to 10 years. Not only will covering the cost of stimulus help the deficit, it will help keep at bay the tons of bad ideas that regularly get thrown into stimulus packages, if they actually have to be paid for.
But policymakers also need to understand that putting in place a multiyear plan to fix the budget is not at odds with fixing the economy, but a central piece of doing so.
The reality is that reducing debt levels may well decrease growth in the very short run as we turn from stimulus to debt reduction, but it will lead to higher growth levels in subsequent years. And if we wait too long to make these changes — and time is quickly running out — we will be hit with a full-blown fiscal crisis, which would be the worst scenario imaginable for helping the economy.
The newly formed supercommittee has been charged with finding savings of $1.5 trillion. Difficult as that may be, the amount is not nearly enough. Given the size of our current borrowing path, this would fail to stabilize the debt as a share of the economy, and it would fail to reassure market- and credit-rating agencies.
Instead, the supercommittee members should “go big” and find savings of two to three times that much, in a credible multiyear plan. One benefit of a medium-term plan is that it can leave room upfront for the economic recovery to continue to take hold.
Moreover, businesses are unlikely to start spending the trillions in cash on their balance sheets until a budget plan is in place. At the moment, businesses know changes will be made, but with no idea what they will look like, making it nearly impossible to plan, invest and create jobs.
Given that both consumers and the government are tapped out, the best hope we have for strong economic recovery is one that is business-led, and an understanding of what the future holds in terms of the budget, taxes and regulations would do wonders in fueling the recovery.
Finally, it is only through a larger plan that real reforms to the tax code and entitlements will come into the picture. If we overhaul the tax system by dramatically broadening the base — by cutting the breaks that litter the tax code — and lowering rates, it would do wonders for economic growth and raise revenues.
Likewise, reforming health and retirement entitlements so they are sustainable, and transforming the budget from one that focuses excessively on consumption to one that favors investment, would transform our nation’s potential for long-term growth.
Neither major tax nor entitlement reform is likely to enter the picture, if we continue to play small ball with budget reforms. The way to focus on the real drivers of the budget problem and the real keys to growth is for the supercommittee to choose to go big and tackle all these issues in one large deal.