Deficit reduction: DOs and DON’Ts

The forum on American debt and deficit had it right. First, don’t panic. Don’t stop the stimulus spending or raise taxes with the economy still near the bottom.

The Center for American Progress [1] and Center on Budget and Policy Priorities convened the forum. Guests included Paul Krugman (NYT), Robert Reischauer (Urban Institute, OMB), Senator Mark Warner (D-VA), and some all star academics.

I won’t attempt a blow-by-blow but some main themes emerged. First, a strong consensus on what NOT to do:

-- DON’T panic at the size of the deficit or worship at the feet of debt reduction.

-- DON’T stop the stimulus spending or raise taxes in the short term. We’re still in the depths of recession. Consumers aren’t spending and neither is business. The government needs to drive demand in the short run. If we quit now, we’ll likely tip back over the wrong side of the precipice.

These charts aren’t from the forum, but can help reduce the panic. America’s debt is high, but well within historical and international norms.

[2]
Source: OMB [3] history, 1930-2008; CBO [4] projections, 2009-11

[5]
Source: CIA [6]

Those are DON’Ts from the forum. There were DOs as well:

-- DO worry about debt in the long term. Our progressive goals – education, health care, high speed rail, help for the needy – cost money. Negative budget numbers make it hard to reach our goals.

-- DO talk about more than just cuts.

Conservatives discuss the budget in terms of spending, and demand cuts. But there are other ways to shrink the deficit. Most obvious is to grow the economy, even if it takes stimulus or infrastructure spending to get there. That’s a different way to shrink the deficit as a percent of GDP.

-- DO go ahead and talk about raising revenues. “Raising revenues” is better language than “tax hikes,” and it opens more doors. Closing loopholes and corporate exemptions are also ways to raise revenue. We might give those Bush tax cuts some extra years during the recession, but ultimately we need to raise revenue. Don’t fall for the conservative framework of a one-side ledger, with spending-cuts as the only path to balance. The ledger has a revenue side as well; we can also level up.

-- DO link what we get with what it costs and where the money comes from. Nobody likes taxes. But people realize that schools and roads cost money. Package them all together.

Behind all of this lurk some political cautions. The ghost of Peter Orszag was often heard, reminding us that the budget problem is a health care problem. We need to fix health care (Medicare and Medicaid, not Social Security) to fix the budget.

Senator Warner recommended that Democrats find some spending cuts or new efficiencies to show good faith effort to control costs. They need to earn the taxpayers’ trust with their money.

Charlie Cook (Cook Political Report) warned that Democrats are likely to lose seats in the 2010 midterm elections, and will have more Senate seats than Republicans open or at risk in 2012. The American people are always suspicious of government, and nowadays they’re angry. They don’t trust government with their money.

Maybe the frustration comes from Republican failures after Hurricane Katrina, Bush bungling in Iraq or the current recession … but it’s the Democrats’ government now, and distrust is the Democrats’ problem. The current distrust jeopardizes long term progressive goals.

The conclusion: DON’T quit the stimulus yet; it’s too soon. But DO attend to the debt in the long run. It’s important both politically and financially to the progressive mission.