Christina Romer, formerly chairwoman of Obama’s Council of Economic Advisors has a column in today’s NY Times Business section titled What Obama Should Say About The Deficit. She says:
My hope is that the centrepiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit.
That is my hope too.
Both the left and right can agree that we can’t sustain deficits of $1.25 trillion for many years. Just in case you didn’t know, that is Obama’s proposed budget for 2011. One which projects revenues of $3.8 trillion.
The thing that left and right find difficult is agreeing on how to eliminate the deficits.
The good news is we have a roadmap from the bipartisan National Commission On Fiscal Responsibility and Reform who issued a report with its recommendations last month.
I thought I’d lay out a few things that many people don’t want to admit.
1) The deficit will not be eliminated without dealing with military spending and social security, which are often mentioned as “untouchable.” This paragraph from Newsweek tells the story:
In Obama’s budget, Social Security costs $787.6 billion; defence costs $928.5 billion; debt payments cost $250.7 billion. Together they total $1.967 trillion. If you remove that $1.967 trillion from the equation, as Lee suggests, you’re left with $1.863 trillion in spending to work with. At this point, balancing the budget—i.e., wringing $1.669 trillion in savings out of that last $1.863 trillion—would require slashing every government program that’s not defence or Social Security (Medicare, Medicaid, veterans affairs, education, and so on) by 89.6 per cent.
The US spends between $7000bn and $900bn on defence (I see a bunch of different numbers), which is about 40% of the entire world’s military spending and six times more than the next largest country, China. While the US is spending its money on military matters, the rest of the world, most notably China, is investing their capital in their economy, infrastructure, and growth. This is going to have to change. And it will require America rethinking its role in the world.
Social security represents about 20% of the federal budget. Our country continues to operate a defined benefits plan while most businesses have moved to a defined contribution plan. The federal government has to follow recognise that Social Security, as currently constructed, is a bankrupt retirement plan. This will require some big changes, many of which are politically difficult. But until we are honest with all americans about the problems with the current approach, we cannot force the changes that are necessary.
2) The deficit will not be eliminated without raising taxes on some people. Letting go of the Bush tax cuts for those who make $250k and over would product $400bn which represents more than 10% of the budget. I recognise that this is a big political issue and one which Obama helped himself politically by letting go of recently. But I really don’t see how the maths works without getting the wealthiest americans to chip in some more money.
3) The rest of the budget, non military, non social security, non interest payments will have to be cut aggressively. The Tea Party wants to cut these areas by 40%. I suspect that is never going to happen. But a 20% cut in these areas, which is what the UK is doing, seems necessary.
If you cut military by 1/3, restructure social security, eliminate the Bush tax cuts on the over $250k crowd, and cut the rest of the budget by 20%, you can probably get the budget balanced. This would have to be done over a decade or so, so as to reduce the fiscal impact on the economy, which will be significant. But I don’t think the US has another option, unless we want to choose bankruptcy.
This post originally appeared on A VC.