An Rx for Debt Reduction?
from Greenberg Center for Geoeconomic Studies and Renewing America: Debt and Deficits

An Rx for Debt Reduction?

Cutting the federal deficit is seen as essential for reviving the country’s economic standing. CFR’s Peter Orszag looks at some of the pros and cons of recommendations by a presidential commission’s co-chairs to cut more than $3.8 trillion from national deficits.

November 12, 2010 10:15 am (EST)

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The release of a draft proposal by two chairmen of President Barack Obama’s eighteen-member deficit commission reinvigorated debate about U.S. debt and the country’s path to economic recovery. The surprise draft--authored by Clinton White House chief of staff Erskine Bowles and former Republican senator Alan Simpson of Wyoming ahead of the commission’s scheduled official December 1 report--proposes to cut more than $3.8 trillion from national deficits over the next decade. The current national debt is roughly $13.7 trillion. The move by Simpson and Bowles is politically shrewd given the commission’s internal divisions, says former Obama budget director Peter Orszag, and will influence policy decisions as much as an officially agreed-upon report. Orszag criticizes liberals’ attacks (TheHill) of Simpson and Bowles’s social security proposals, which he says would allow for a more progressive benefits formula, a more progressive payroll tax, and private accounts that would not be part of social security. But the draft plan’s call for the government to cap its tax revenues at 21 percent of GDP is unrealistic, says Orszag, given the political infeasibility of much more dramatic cuts to healthcare and discretionary spending.

What does this draft proposal achieve, since it’s not a piece of legislation or the finalized recommendation due December 1?

I always thought that the most likely mechanism through which the commission would exert its influence was through a proposal from the co-chairs. There has been a lot of focus on whether the co-chairs would be able to get fourteen or more votes in favor of a recommendation.  While that may or may not still be possible, the discussion that the co-chairs’ suggestions has prompted shows it may not matter that much whether they ultimately get an official recommendation, since, as you see from the reaction to the proposal, it is generating substantial discussion.

Ultimately its impact will depend in part on how the administration decides to respond. That, in turn, will reflect a choice that the administration faces about whether it decides to tack to the left or tack to the center. From the initial reaction, it is clear that the left in particular is not very pleased with the proposals from the co-chairs.

Attacks have been launched at the proposals from both sides of the political spectrum. Does the draft strike you as partisan?

The more that’s done to reduce the deficit in the out-years, enacted now but to take effect in the future, the more it becomes plausible that we could actually get another round of stimulus.

No, it seems to have displeased both the left and the right, so it doesn’t strike me at partisan. And on Social Security in particular, the reaction from the left seems off to me. If you look at the specific Social Security proposals in the co-chairs’ set of recommendations, they include a change that makes the benefits formula more progressive; they include a change that makes the payroll tax more progressive; they include changes to make the index used to measure cost of living increases more accurate. Most importantly, the proposals don’t include private accounts as part of social security, which, four of five years ago, had been the single most important thing that progressives were fighting against. The proposal now offers an opportunity to lock that in, because in ten, or fifteen, or twenty years, assuming there’s not a reform now, those issues may well be back on the table. Private accounts as part of Social Security are definitively dead for now, so I don’t fully understand why the left is not eager to lock in that victory.

Also, right now, the left is most concerned about a gap in aggregate demand, and the need for more stimulus, which is a concern I share. But additional stimulus currently has about zero chance of getting enacted. The more that’s done to reduce the deficit in the out-years, enacted now but to take effect in the future, the more it becomes plausible that we could actually get another round of stimulus.

The plan proposes capping government revenues at 21 percent of GDP. Is that reasonable, given your recent push for revenue increases and rising Social Security and healthcare costs?

Once you move beyond Social Security reform, the other components of the proposals are well-intentioned in general but, as could be expected when many proposals are put forward, some of them are problematic in detail. The revenue cap is one of those; I wouldn’t favor it personally, although getting up to 21 percent of GDP in revenue would be a lot better than the current path we are on. We’re at about 15 percent now, but that will increase as the economy recovers.

There’s no way you can legislatively get everything that’s in the co-chairs’ proposal. And the items that strike me as perhaps the least plausible are the size of the discretionary spending reductions.

On healthcare, it would be an accomplishment to achieve all of the savings already enacted in the healthcare legislation. So I applaud the effort to move even further beyond that, but it is going to be very challenging. For example, it would be great to expand the accountable care organizations (which group doctors and hospitals together to better coordinate care) and bundled payments (which provide a single all-in payment for treating a patient with a particular condition, rather than paying individually for each service), as the co-chairs’ proposal does. And the attempt to strengthen the Independent Payment Advisory Board [the newly-created commission charged with slowing the growth in Medicare spending] is fabulous. I would strongly support that. At the same time, it illustrates the challenge because even defending the version of that board that exists in the health legislation is going to be difficult.

In other words, there’s no way you can legislatively get everything that’s in the co-chairs’ proposal.  And the items that strike me as perhaps the least plausible are the size of the discretionary spending reductions. I would put social security at the top of the plausible range, if the administration embraces the effort, but perhaps that captures the point. Because even with social security, the reactions we saw yesterday show it is going to be extraordinarily difficult to do.

Does the plan, which would begin in 2012, give the country enough time to recover from the economic downturn?

Concern about the timing is a high-class problem to have. If we were actually about to enact all of this, I would worry about tweaking the timing a little bit.

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