Photo: St. Louis Fed
The congressional Republican goal of balancing the budget in 10 years seems a solution in search of a problem. Proponents seem more focused on the politics and optics of the idea than the economics. The 10-year goal supposedly provides a) sharp contrast to President Obama’s apathy toward the issue and b) clear and simple policy for dispirited GOPers to rally around.Perhaps that’s true. But is the party’s urgent political problem that voters think the party squishy on spending? After all, exit polls had Mitt Romney edging President Obama on who would do a better job cutting the deficit. The public also, for now, seems to prefer cutting debt through a combination of tax increases and spending cuts. In addition, polls show the debt issue is a distant second to economic growth and job creation. Republicans have been unsuccessful in connecting America’s historically high debts and deficits to the problem’s Americans face in their everyday lives.
The economic case here is even sketchier. First of all, balancing the budget in a decade will be difficult. The recent Congressional Budget forecast — which includes the sequester — places the 2023 deficit at $978 billion, or 3.8% of GDP. How to close that trillion-dollar gap? Discretionary spending in 2023 will be 30% below the average for the past century, which leaves entitlement cuts a better target. But following that path would mean, for instance, changing Medicare benefits for current and near-term recipients, not just for younger Americans. That’s a good idea but one that Republicans have been loathe to embrace. Another option is assuming faster economic growth through tax reform and deregulation, but Democrats and many budget experts would probably cry foul.
Even if Republicans can cook up a reasonable plan to balance the budget in a decade, is that a public policy worth doing and spending political capital? The key measure of fiscal health is a nation’s debt-to-GDP ratio. And you can lower that ratio without actually balancing the budget or running a surplus. Rep. Paul Ryan’s original “Roadmap” plan lowered debt-to-GDP by 30 points over two decades without a single year in the black. And that was assuming slow-growth CBO forecasts.
A reasonable policy goal would be to get the debt-GDP ratio off the stabilisation path and onto a downward trajectory toward a sub-40% level — from over 70% currently — over the next two decades. (From 1957 to 2007, the Tax Policy centre notes, the the debt ratio did not exceed 50% and averaged just 37% of GDP.) And ASAP entitlement reform must be part of that effort.
The BB-10 effort also distracts from the more important goal of constructing a broad portfolio of ideas — taxes, immigration, public investment, consumer-driven healthcare — that would increase economic growth, broadly raise incomes, and help solve real-world problems in the lives of average Americans. Majority Leader Erick Cantor’s recent speech at AEI was a good start. Expanding up it would be both smart politics and policy.