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Fixing the Debt and Deficit

“Over the next few months, Congress faces a vitally important test. The question

is whether we can balance the need to reduce the deficit with the need to protect

important priorities at home and abroad. There is a narrow path to passing that test, but

we must try.” As Carl Levin, chairman of the Senate Armed Services Committee, wrote

before the start of sequestration, the path to reducing the deficit while maintaining

sufficient spending levels in key foreign and domestic areas will be a very difficult task. 1

Several attempts have been made recently to address reducing the debt and deficit such as

the Budget Control Act that raised the federal debt ceiling to prevent a default on the

debt, cut $917 billion in spending, established a supercommittee that worked to further

reduce the debt by $1.5 trillion over a 10-year period, and established a clause for failure

to achieve the necessary cuts. The clause, if triggered, initiated $1.2 trillion in automatic

spending cuts that would be derived equally from defense and domestic programs.2 The

clause was enacted March 1, 2013 as members of Congress failed to reach the required

cuts and the country is currently dealing with the consequences, which range from flight

delays to “greater risk of wildfires, fewer OSHA inspections and a risk of more

workplace deaths” among others.3 Prior to this, President Obama created the Fiscal

Responsibility Commission co-chaired by Alan Simpson and Erskin Bowles4. The goal of

the bipartisan commission was to determine how best to reduce the deficit. The

commission recommended deep cuts to Social Security and Medicare as well as raising

taxes, they believed that while difficult to achieve, it was the best possible solution. As

expected, both Democrats and Republicans rejected the proposal as too harsh. Deficit                                                                                                                1  Levin,  Carl.  “How  to  Pass  the  Deficit  Reduction  Test.”  June  15,  2012.  2  Thurber,  James  A.  “The  Dynamics  and  Dysfunction  of  the  Congressional  Budget  Process:  From  Inception  to  Deadlock.”    3 Good, Chris. “57 Terrible Consequences of the Sequester.” ABC News. Feb 21, 2013 4  Ibid.  

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reduction will not be an easy process and will require a great deal of negotiation, but

ultimately, reductions must occur. The Bowles-Simpson commission’s recommendation

while rejected by many, offered the best solution to reduce the deficit. The costs of

programs like Social Security and Medicare will only continue to increase as more baby

boomers retire, but cuts to these programs must be made. Moreover, taxes continue to

remain at historic lows, which cannot continue if the deficit is to be reduced. According

to the 2012 Congressional Budget Office, federal taxes in 20095 averaged 17.4 percent,

which is a historic low for the period between 1979 and 2009.6 While there is little

support for raising taxes to Clinton-era levels in either Congress or the White House, if

they were raised to Clinton-era levels they would generate $2.35 trillion more in revenues

over 10 years than what Obama proposed in 2012.7 Achieving these goals, however, will

be quite difficult and will need to be implemented gradually over time.

President Obama recently announced a new budget proposal that addresses many

of the mentioned goals. Obama’s proposal includes: $1.8 trillion in deficit reduction over

10 years, $400 billion in health care spending savings, $200 billion in savings from

reductions in farm subsidies and reforms to federal retirement benefits, $200 billion in

other savings equally from defense and domestic programs, savings of $230 billion in

savings from using a chained measure of inflation for cost-of-living expenses, and $210

billion in savings from reduced interest payments on debt.8 The proposal also reforms the

tax system by requiring households with incomes over $1 million pay at least 30% of

their income in taxes, limits tax deductions and other tax benefits for the top 2% of

families to 28%, gives a 10% tax credit to small businesses that hire new employees or                                                                                                                5  2008 and 2009 is the latest year for which comprehensive data is available is for household income and federal taxes.  6  “The  Distribution  of  Household  Income  and  Federal  Taxes,  2008  and  2009.”  Congressional  Budget  Office.  Aug.  10,  2012.  7  Klein,  Ezra.  “Democrats  don’t  want  to  go  back  to  Clinton-­‐era  rates.”  The  Washington  Post.  Sept.  5,  2012.  8  “Fiscal  Year  2014  Budget  Overview.”  Office  of  Management  and  Budget.  The  White  House  

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increase wages, closes loopholes and provides incentives for research, manufacturing,

and clean energy.9 While this proposal is a start, it does not adequately address long-term

deficit reductions and it includes additional spending of $520 billion over 10 years.10 This

is not ideal as the intent of deficit reduction is to reduce the deficit, not cut certain areas

and increase funding in others. Many Democrats including Senator Mark Warner (D-VA)

support this proposal, but groups like the A.F.L.-C.I.O. are strongly opposed, as they

believe the cuts are too deep to Medicare and Social Security.11 Moreover, it will be

difficult to convince most Republicans to pass this budget proposal, as they are

adamantly opposed to raising taxes. Therefore, in addition to Obama’s proposal,

additional changes need to occur.

One source of further changes could come from military cuts. Several programs

like the F-35 fighter jet have not only run over budget, but have proven to be fatally

flawed in design. The program is now estimated to cost $400 billion and is expected to

cost $1 trillion over its 30-year life.12 While much of this has already been spent,

cancelling this program and delaying similar programs can save at least $20 billion in the

short-term and billions more in the long term.13 Reducing the federal workforce is a

popular idea among many Republicans and is a key piece of the Paul Ryan (R-WI)

budget plan. Ryan, the House Budget Committee Chairman, proposed reducing the size

of government to 20 percent by 2015, which would save billions. Ryan also addresses

defense, however, his proposal increases spending by $554 billion.14 There is likely to be

a middle ground between the Obama and Ryan proposals that can be reached to cut

                                                                                                               9  “Fiscal  Year  2014  Budget  Overview.”  Office  of  Management  and  Budget.  The  White  House  10  Ibid.  11  Calmes,  Jackie.  “Obama  Budget  Opens  Rift  for  Democrats  on  Social  Benefits.”  The  New  York  Times.  Apr.  10,  2013.  12  “Weinberger,  Sharon.  “F-­‐35  Joint  Strike  Fighter  battles  for  future.”  BBC.  Apr.  11,  2013.  13 “Get a Pencil. You’re Tackling the Deficit.” The New York Times. 14  “The  Path  to  Prosperity:  A  Blueprint  for  American  Renewal.”  Fiscal  Year  2013  Budget  Resolution.  House  Budget  Committee.  

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programs like the F-35 jet, while keeping programs that will strengthen our military, thus

saving billions. Bowles and Simpson recently released a new proposal that would cut

Medicare and Medicaid funding by an addition $200 billion over what the Obama

proposal calls for. This would likely be popular among Republicans as the Ryan plan

calls $885 billion in cuts.15 Moreover, the additional proposal cuts would cut the budget

by nearly $1 trillion more than Obama’s proposal. While considerably less than the $4

trillion proposed by the Ryan plan, this would show Republicans that Democrats are

willing to negotiate and at least meet the Republicans half way, which might encourage

them to discuss raising taxes.

Even with these additional cuts passing a budget with these provisions would

likely prove to be quite difficult and many barriers remain. Most Republicans support the

Ryan proposal, which passed in the House 221-207 with no Democrats voting for it.16 In

the Senate, most Democrats support Senator Patty Murry (D-WA) proposal that passed

50-49.17 Her proposal was drastically different from the Ryan budget, but somewhat

similar to the Obama proposal. Early negotiations between the two budget proposals

have not progressed well as the Republicans do not want to raise any taxes while the

Democrats believe it is necessary. Finding a compromise between the Ryan and Murry

proposals may prove impossible, however, the Obama budget proposal coupled with the

suggestions mentioned previously could prove to be the potential needed bridge that

could close the gap between the Democrats and Republicans. There is some agreement

between the two parties regarding the chained CPI proposal in the Obama proposal,

                                                                                                               15  “The  Path  to  Prosperity:  A  Blueprint  for  American  Renewal.”  Fiscal  Year  2013  Budget  Resolution.  House  Budget  Committee.  16  H.Con.Res. 25: Establishing the budget for the United States Government for fiscal year 2014 and setting forth appropriate budgetary levels for fiscal years 2015 through 2023.    17 Raju, Manu. “Patty Murray budget: $1 trillion in new revenue.” Politico. Mar. 12, 2013

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which could be used as a starting point in negotiations. If they added in higher cuts to

Social Security and Medicare this would further strengthen Republican support as well as

increasing other spending cuts it could reduce some of the unwillingness to compromise

on taxes. It will, however, be difficult to convince Republicans that tax increases are

necessary, particularly because the Ryan proposal manages to balance the budget in ten

years without raising taxes. Ultimately it is difficult to determine how this might be

accomplished and tax increases may not be able to be included in the final agreement.

A final option is that the 2014 elections are looming, perhaps enough Democrats

can be elected in the House to gain a majority and pass this proposal or the Murray

proposal that passed in the Senate. The barriers would be reduced, as the Murray

legislation already is popular among many Democrats and the incentives would include

finally passing a budget that significantly reduces the deficit, which will be popular

among their constituents.